Raising inflation target not subject of Fed discussion | Fed should not mechanically follow any policy rule | Balance-sheet plan aimed at avoiding market disruption | Warns on U.S. debt | Repeats plans to serve out her Fed term
Federal Reserve Chairwoman Janet Yellen is testifying today before the House Financial Services panel.
Link to hearing. Link to testimony.
— Yellen doesn’t like GOP policy proposals: She pushed back on two GOP proposals that would force the Fed to spell out a more specific formula for setting monetary policy, and allow Congress to set the Fed’s budget. President Trump’s first nominee for the Fed board, Randal Quarles, has expressed openness to the ideas. She also said she would be very concerned about exposing the Federal Reserve to congressional appropriations.
— Policy tools: Yellen does not think the Fed should mechanically follow any policy rule. She repeated previous statements about how the Fed has a “relatively light” regulatory agenda but is open to making rule changes that would help community banks or reevaluate the Volcker rule, which restricts certain types of bank trading.
— A warning on U.S. debt: She said the U.S. debt trend if not dealt with will lead to an unsustainable debt situation. Yellen urged Congress to take into account the growth trajectory of the federal debt when making decisions about spending and taxation. She said lawmakers need to work toward achieving “sustainability of this debt path over time,” warning it could weight on productivity growth and living standards of Americans. The Congressional Budget Office estimated last month the national debt could reach 91% of gross domestic product by 2027. Lawmakers are weighing major fiscal policy changes, including tax cuts, changes to health care and infrastructure spending, that could drive deficits higher in the coming years.
— Inflation: She said raising the inflation target is not the subject of Fed discussion, adding that 2% is not a celling, but a symmetric objective. In recent weeks, several Fed officials have openly talked about whether the Fed should reconsider its target for a 2% inflation rate. “It is not,” Yellen said in answering whether the Fed was discussing this possibility. She said, “temporary factors” were at play relative to current inflation levels.
— Her term at the Fed: She repeated plans to serve out her term as Fed chairwoman (ends in February) and that she was pleased to see a nomination for the open seat on the Fed board (Randal Quarles, an investment-fund manager and former Treasury official, is on tap to be vice chair of supervision.) Asked is she would serve another term if asked, Yellen said: “I absolutely intend to serve out my term. I’m very focused on trying to achieve our congressionally mandated objectives, and I really haven’t had to give further thought at this point to this question.”
— Bank-board issues: Yellen confirmed that the Fed is reevaluating its expectations for bank boards of directors, an issue that has also been raised by Fed governor Jerome Powell. Bankers have been complaining for years that post-crisis rules have placed too many new obligations on boards of directors. “We are focused on trying to clarify expectations for boards of directors to distinguish the important role that they have in the banking organization,” Yellen said.
— Praise for Yellen. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) had some rare praise for the Fed, saying its moves towards a more normal monetary policy and balance sheet were positive. He also hit on the potentially politically controversial issue of the Fed paying interest on excess reserves that banks park with it. That interest should not become a normal part of monetary policy, he warned.
— Balance-sheet wind-down should begin ‘relatively soon’: Yellen said the FOMC’s expected balance-sheet wind-down is something that, “to my mind,” should begin “relatively soon.” While exact timing doesn’t matter “a great deal,” it is “something we are all preparing to undertake,” Yellen said. “We have been trying to very carefully lay out our plans to normalize the size of our balance sheet in a gradual and predictable way.” If the economy continues to evolve in line with expectations, that portfolio process should start soon, she indicated. She said that the Fed’s balance-sheet plan is aimed at avoiding market disruption.
— Fed looks at asset prices to assess potential spillovers: As asset prices rise, there has not been a substantial increase in borrowing, Yellen said, adding that the financial system is strong and resilient. She noted that American firms have been sitting on a lot of cash for years. In looking at asset prices and valuations, the central bank is “not trying to opine on whether they’re correct”; instead, policy makers are assessing the risk of potential spillovers, Yellen said.
— Appropriate to remove accommodation as economy approves: Yellen said “policy remains accommodative” and “we perhaps have some further moves that we envision making” given “how low estimates of the neutral fed funds rate are right now.” Neutral fed funds rate level “may move up some,” Yellen said in response to questions.
— Deutsche Bank and President Trump: Democratic lawmakers have pressed Deutsche Bank for information about loans it made to President Donald Trump over the years, as well as transactions involving Russia and Russian clients. Yellen said the Fed has not been looking at transactions involving the president. “Our focus has been on the safety and soundness of the operations of Deutsche in the U.S.,” Yellen said.
— Market reactions: Yellen’s prepared comments, labeled dovish by many analysts, pushed the Dow Jones Industrial Average to a new intraday high after the opening bell. The Dow industrials rose 151 points, 0.7%, to 21,560, above its previous closing high of 21528 hit June 19. U.S. government bonds also rallied. In recent trading, the yield on the benchmark 10-year Treasury note was 2.309%, according to Tradeweb, compared with 2.344% before Yellen’s testimony was released and 2.362% Tuesday. Yields fall when bond prices rise. The WSJ Dollar Index, which measures the U.S. currency against 16 others, fell 0.1% to 88.1. The dollar was down against the Japanese yen and emerging-market currencies but rallied against the euro.
Other key points in Yellen’s testimony and remarks:
- Said the Fed is one of the most transparent central banks in the world.
- Gradual interest rate increases are expected to be made by the Fed “over time” provided the U.S. economy continues to progress as the Fed currently expects.
- She is strongly opposed to auditing the Fed.
- Global economy has recovered, now source of support.
- Unemployment is running below what the Fed considers sustainable.
- Fed balance sheet to shrink to more normal sometime around 2022; expects balance sheet unwind to go smoothly.
