February 13, 2017, 4:00pm EST

Today we heard from Janet Yellen in the first part of her semi-annual testimony to Congress.  She gave prepared remarks to the Senate today and took questions.  Tomorrow it will be the House.  The prepared statement will be the same, with maybe a few different questions.

Remember, just four months ago, the most important actor in the global economy was the Fed.  Central banks were in control (as they have been for the better part of 10 years), with the Fed leading the way.

The Fed was the ultimate puppet master.  By keeping rates ultra-low and standing ready to act against anything that might destabilize the global economy and threaten to kill the dangerously slow recovery, they (along with the help other major central banks) restored confidence, and created the stability and incentives to drive hiring, investing and spending — which created economic recovery.

When Greece bubbled up again, when oil threatened to shake the financial system, when China’s slowdown created uncertainty, central banks were quick to step in with more easing, bigger QE, promises of low rates for a very long time, etc..  And in some cases, they outright intervened, like when the ECB averted disaster in Italy and Spain by promising to buy unlimited amounts of Italian and Spanish government bonds to stop speculators from inciting a bond market collapse and a collapse of the euro and European Union.

This dynamic of central bank activism has changed.  The Fed, and central bank intervention in general, is no longer the only game in town. We have fiscal stimulus coming and structural change underway that has the chance to finally mend the decade long slump of the global economy.  That’s why today’s speech by the Fed Chair was no longer the biggest event of the week — not even the day.

The scripts has flipped. Where the Fed had been driver of recovery, they now have become the threat to recovery. So the interest in Fedwatching today is only to the extent that they may screw things up.

Moving too fast on interest rate hikes has the potential weaken or even undo the gains that stand to come from the pro-growth policies efforts from the new administration.

Remember, the Fed told us in December that they projected THREE hikes this year.  But keep in mind, they projected FOUR in December of 2015, for 2016, and we only got one. And that was only AFTER the election, and the swing in sentiment regarding the prospects of pro-growth policies.

Remember, Bernanke himself has criticized the Fed for stalling momentum in the recovery by showing too much tightening (i.e. over optimism) in their forecasts.  And he argued that the Fed should give the economy some room to run and sustain momentum, fighting inflation from behind.

On that note, the Fed has now witnessed the bumpy path that the new administration is dealing with, and will be traveling, in implementing policy.  I would think they would be less aggressive now in their view on rate hikes UNTIL they see evidence of policy execution, and a lot more evidence in the data.  Let’s hope that’s the case.

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