Tag Archives: Janet Yellen

Yellen Breaks the Ice

In her inaugural public appearance since becoming the central bank’s first chairwoman, Janet Yellen confirmed that her intention is to continue the policies of her predecessor (Ben Bernanke). According to the Wall Street Journal, “Her comments left little doubt that her plan – as was Mr. Bernanke’s – is to tiptoe away from those policies only gradually as the economy improves”. I agree that it is time to wind down the Fed’s unconventional monetary policy in which it conducts large-scale asset purchases. First, quantitative easing seems to have served its purpose of lowering long-term interest rates. Second, I still worry that we might face some undesirable consequences from quantitative easing down the road. Now that quantitative easing has fulfilled the intentions of its creators, it should be phased out sooner rather than later in order to reduce whatever unintentional effects might be looming in the future.

Although the continuation of the taper means a reduction in stimulus, financial markets responded well to the plan that Yellen outlined. Furthermore, I think financial markets were extremely pleased that Yellen appeared completely as advertised (meaning she performed as expected and without any surprises). According to the Wall Street Journal, “In two instances, she thanked lawmakers for calling her unexciting”. Yellen’s primary theme during her public appearance was predictability. Every detail of the presentation seemed to be planned perfectly. The financial markets are notably sensitive to everything, which includes what Yellen says and how she says it.

Yellen’s calm demeanor and clear rhetoric is exactly what everyone was hoping for and I think the financial markets were extremely pleased with the lack of surprises. According to the Wall Street Journal, “The markets, having anticipated a steady stance, greeted Ms. Yellen’s comments with approval”. As expected, Yellen will continue with the taper and not change the course of the Fed. Despite the two months of disappointing employment reports, the Fed will taper at the same pace ($10 billion reduction per month). Although financial markets rallied when the Fed surprisingly delayed the beginning of the taper last year, I do not believe the financial markets would handle such a surprise the same way today because tapering has already begun. Unless a significant problem develops in the economy, such a deviation from the plan set out only a month ago would signal a lack of confidence in the recovery. If the Fed was confident enough to announce the taper in December, then a departure from the taper only a month later would likely spook investors. Obviously, a major change for the worse would lead the Fed to dramatically change course. However, that event has not occurred yet and I hope it will never.

Yellen was so eloquent that she even managed to dodge the numerous questions she received regarding financial regulation. Although she did not provide any significant details, she seemed to defend and support the Dodd-Frank legislation. According to the Wall Street Journal, “[Yellen’s] comments suggest she’s likely to continue the Fed’s efforts to implement the 2010 Dodd-Frank financial overhaul in a way that places higher burdens on companies viewed as posing risks to the broader financial system. That could mean more capital and liquidity rules requiring the biggest banks to meet higher standards than smaller firms”. The implementation of Dodd-Frank has been a lengthy process with much scrutiny. On the one hand, some critics claim it is too tough and requires banks to hold too much capital. On the other hand, some critics claim it is too lenient and does not require banks to hold enough capital. In this situation, I am torn because I do not know the right amount of capital for banks to hold.

Currently, the additional amount of capital that banks are required to hold is already noticeable. For example, the return on equity for the largest financial institutions is down considerably. Although I understand that the intentions of Dodd-Frank is to avoid the next financial crisis, forcing banks to hold excess capital likely also restricts them from making loans and engaging in other activities that spur economic growth. I would imagine that Dodd-Frank will be shaped to keep American banks on the same page as European banks, which are subject to Basel III capital requirements. I think that it is in the best interest of the global economy to have similar global financial regulations. Otherwise the financial institutions of some countries will have a competitive advantage, but also be much riskier and be a potential danger to the global financial system. I look forward to how Dodd-Frank and other financial regulations are executed.

Meet the New Boss: Welcome Janet Yellen

Earlier this month, on February 3rd, Janet Yellen took the helm as the first woman Chair of the Federal Reserve. She succeeded Ben Bernanke, the Chairman who saw the American economy through the greatest economic crisis since the Great Depression. The economy has not yet fully recovered from the Great Recession but thanks to unconventional monetary policy during Bernanke’s tenure an all out depression was averted and we have made great strides in recovering from the lows. In the wake of the crisis, Bernanke’s Fed pushed nominal interest rates to zero and performed three rounds of quantitative easing to further boost liquidity at the zero lower bound. The latest round – QE3 – which is still ongoing, was initiated in September 2012 and originally consisted of $85 billion in monthly purchases of treasuries and mortgage backed securities. Now as Yellen takes over at the Fed, the question on the minds of observers is how to unwind or “taper” this stimulus program. Bernanke, a student of the Great Depression, took unprecedented steps to avert an economic disaster – Janet Yellen, who served in the Fed throughout the 2000s both as President of the San Fransisco Federal Reserve Bank and as Vice Chair, will carry on the legacy and economic ideology that Bernanke brought to the Fed to continue to guide the recovery.

This Tuesday, February 11th, Janet Yellen appeared before the House of Representatives Committee on Financial Services to deliver her first semiannual report on monetary policy. In her testimony, Yellen remained committed to the policy first set forth by Bernanke. As she points out, she was an insider – as Vice Chair she was a part of the Committee that originally implemented the quantitative easing programs. Mrs. Yellen reaffirmed the Fed’s plan to taper the bond buying program in set monthly increments of $10 billion baring extraordinary and unforeseen negative events. Yellen seems to be committed to the policy prescriptions set in place by Bernanke, which should reassure financial markets that have priced in the steady taper.

Yellen did face some criticism from Republicans on the House Committee over the expansionary policy and low interest rates. As the New York Times describes, Republican representatives were concerned about the possibility of “planting the seeds of inflation and starving savers of income.” The current policy is designed to stimulate the economy as a whole and while that may mean that elderly citizens who rely on investment income in the form of dividends and interest may have their incomes squeezed, raising interest rates with unemployment this high would have far greater negative repercussions on everyone.

Further, in an editorial published in the Wall Street Journal today, Judy Shelton cautiously welcomed Janet Yellen after her testimony, claiming in an almost condescending tone that the new Chairwoman had “mastered the art of Fed speak.” Shelton also went on to criticize Yellen for her role in convincing Greenspan to keep an inflation target of 2% during the 1990’s, which persists to this day. While Shelton may take issue with the fact that “her definition of price stability would let the dollar lose more than 20% of its value each decade,” we know from class discussion that this positive inflation target is immensely important to monetary policy flexibility. Because nominal interest rates are fixed at the zero lower bound, running modest positive inflation around 2% allows the Fed to push real interest rates below zero and stimulate spending further than if we were to have zero inflation.

Overall, Yellen’s first public appearance has provided reassurance that she will be able to meet the challenges of the job, which her predecessor handled so well. The job of Chair of the Federal Reserve is one of the most powerful and important positions in the world and as such, it will always be met with critics. Yellen appears ready for the challenge and will carry on the task that Ben Bernanke has left her with ease.

Stock Market Optimism

Despite recent perceptions of negative stock market conditions, The Dow Jones Industrial Average rose 7.71 points, which reversed a loss of as much as 60 points from Monday to record its third consecutive gain. The S&P 500 rose 2.82 points and the Nasdaq rose 22.31 points. Given the recent signs of slowing economic growth, it looks as though investors feel comfortable with stocks at current levels.

Managing director at Rosenblatt Securities, Gordon Charlop, commented that this was probably the best case scenario that we could have hoped for because the market didn’t break down. Many investors expect more volatility in 2014 after December’s less-than-ideal performance, especially after the pullback in Fed stimulus. However, many other investors still expect stocks to end higher on the year as long as corporate profits show strength. According to Thomson Reuters Corporation, about 68% of companies have reported fourth-quarter earnings that beat market expectations. This means that the market should continue in the same direction as long as earnings come in as they’re expected.

So far, earnings have been good, but there are also investors concerned about profit outlooks that companies have provided. As the US markets have currently experienced an overall gain, other quarters have ended lower such as industrials and energy stocks. Investors’ doubts root back to the current conditions in emerging markets. Given that earnings in emerging markets are unstable, this poses as a risk to multinational companies because they are trying to grow in emerging markets. Looking forward to the future, investors are anticipating Janet Yellen’s testimony to congress on Tuesday and Wednesday. However, most people do not feel that she will hold off on taper because they are not worried about surprises.

Last week I wrote about the effect of emerging markets in the US stock market. Now, it seems as though stock market expectations are much more optimistic. Even though Ms. Yellen’s testimony is Tuesday and Wednesday, some investors feel comfortable taking bullish positions. For example, “Joel Johnson, founder of Johnson Brunetti Retirement & Investment Specialists, said the market could remain volatile over coming weeks amid uncertainty over the economy and Federal Reserve policy, but he recommends investors not to overreact to short-term market weakness.” He is currently recommending his clients to expect pullbacks, remain on the same course, and they shouldn’t see what they saw last year. He advised that they should expect little a little volatility, but overall, markets should finish modestly higher and the economy should be in a better spot.

The challenge for Janet Yellen

New Fed Chairwoman, Janet Yellen surely has many difficult issues to deal with from the beginning. The Wall Street Journal introduced some of key issues about which Janet Yellen is likely to be questioned during her debut as the Fed Chairwoman in Congress. These include tapering bond buying program, interpretation of labor market situation, 6.5% unemployment threshold, current emerging countries’ financial markets turmoil and financial regulation.

Among other things, whether the Fed keeps tapering bond buying is directly and indirectly connected to many other issues. If the Fed keeps tapering bond buying program as many economists expect, then we can think that the Fed may regard slowdown of job growth in recent two months as not so serious problems, and also regards overall employment conditions as improving.  In that case, I think that the Fed may cautiously keep its 6.5% unemployment threshold with some additional caveats .

But I think that the Fed will be cautious about tapering of bond buying program in the future. As we can see from the example of Japan, which has kept its loose monetary policy for decades but is still struggling for economic recovery, hasty tapering of bond buying program may hurt recovery of economy and it may be much harder and costly to revive economy again. In that sense, even though some  economists and the Fed officials worry about possible inflation mainly due to uncharted loose monetary policy of zero interest rates and bond buying program, I think the Fed should keep its loose monetary policy until the recovery of economy is fully ensured. I guess Janet Yellen may rethink about keeping tapering of bond buying program in the near FOMC meetings.

Another big challenge for Janet Yellen is how to manage increasing role of the Fed in financial regulation sector. As a lender of last resort, central banks are usually takes some responsibility of financial regulation. The Great Recession asks for more responsibility of the Fed for the financial regulation. Considering its complexities of new financial regulation like Dodd-Frank Wall Street Reform and Consumer Protection Act and ever-developing financial engineering, the Fed needs to strengthen its ability for financial markets regulation and accumulate knowledge of financial regulation inside organization. Also, unlike monetary policy, the Fed does not take sole responsibility for financial regulations and financial stability. There are several other financial regulators. So, how to build optimum cooperative relationship with other financial institutions will be key issue for effectiveness of overall financial regulations in the U.S. I think this will be one of the main managerial and organizational challenges for Janet Yellen. Now lets’ see her first stage as the Fed Chairwoman and hope for success of the first chairwoman.