On Tuesday, Federal Reserve Chair Janet Yellen took questions from the House Committee on Financial Services after a prepared testimony. It was her first public comments since she assumed the role as head of the U.S. central bank.
Promising continuity of her predecessor Ben Bernanke's policies, Yellen outlined her goal of continuing to taper so long as "incoming information" showed improvements in job markets and pushed inflation toward the Fed's goals.
Yellen took questions from all 60 members of the House panel. The testimony stretched long into Tuesday afternoon.
Here is a recap of the five most important takeaways from the afternoon session of Yellen's testimony.
- Yellen Delivered Calculated, Risk-Averse Answers: Janet Yellen was very calculated in the way she responded to questions. There was no new terminology, and the statements were very academic and focused on repeating many of the same terms and traditions laid out by the Fed in the last two years. The reason is simple: She didn't want to provide the markets with any reason to react negatively. The core theme of the conversation was "continuity" of her predecessor's policies. One of the reasons for today's rally is the reassurance that the Fed Chair provided to the markets.
- There Is No Time Limit on Bond-Purchasing Tapering or Interest Rate Hikes: Congressman Jeb Hensarling (R-TX) immediately raced to the Republican point today, asking when the Federal Reserve will consider a rate hike. The unemployment rate is at 6.6%, a tick above the target rate of 6.5% before the Fed said it would move on rates. Meanwhile, Rep. Randy Neugebauer (R-TX), asked when the bond-purchasing program would end, as he argued it fueled a dramatic increase in the nation's debt. Yellen explained that the Fed's bond buying is to improve economic growth, a mandate set by Congress. She also explained that it would hurt the economy and debt if the Fed purposely raised interest rates. As she noted, income economic data will be the driving force in the Fed's decisions moving forward.
- Congress Still Has No Plan for Job Creation: Multiple members of Congress asked questions related to jobs and improving the employment situation around the country. Some asked for endorsements of Work and Infrastructure Programs, but those programs do not create sustainable long-term employment, which should be the priority of the Fed. Other Members of Congress discussed the impact of technology and lack of job training in the country. Yellen explained that the Federal Reserve's goal was to create an environment for job growth and increased employment, but she explained how "monetary policy is not a panacea," or a remedy for all difficulties. The only thing worse than many members misunderstanding of the Fed's role and Congress' role in job creation was the sheer number of times they interrupted her to bloviate on their topic of choice.
- No Bubbles in Stocks; Overvaluation in Land Prices: Yellen faced additional questions about the record run by the markets in recent months and was challenged with the dreaded "B" word: bubble. Though she said she kept her eye regularly on excess in the financial system, she noted that she didn't see leverage or credit issues that could be warranted as bubble territory. "There are a few areas where we do have concerns but nothing broadly speaking," she said. One of the areas where she did see an issue was in overvaluation in land prices.
- No Audit to the Fed: This was a fascinating testimony because of Yellen's endurance and willingness to answer questions from all members of the committee. While many new Democratic members to the committee asked questions about job creation, new Republicans took aggressive swings at Fed policy. While debt and deficits are par for the course, the topic of auditing the Fed is a very contentious topic, particularly to the head of the Federal Reserve. Yellen strongly opposes a current bill in the House that would have the Government Accountability Office audit the Fed's monetary-policy decisions, stating that doing so would allow the agency to "second guess" its rate decisions. Rep. Ron Paul (R-TX) first proposed this idea in the house. It has since been backed by his son, Sen. Rand Paul (R-KY). The topic will surface at her Senate testimony on Thursday.
What Comes Next?
The most important statement in Yellen's testimony is the statement that the tapering effort of the stimulus is reliant on "incoming information," meaning economic data tied to the U.S. economy. The Fed is taking a reactive approach to the data rather than a proactive stance.
Money Morning Chief Investment Strategist Keith Fitz-Gerald said last month that recent economic data does not justify a taper. Keith predicts that Yellen and the Fed could change course in the coming months.
"We will see Yellen re-engage the printing presses, even if she calls the 'innovative' market actions she's supported something other than stimulus later this year," said Fitz-Gerald.
One of the biggest reasons that the Fed could reverse its taper decision centers on employment.
On Friday, the U.S. economy did not meet expectations of job growth, creating just 113,000 jobs compared to economist forecasts of 185,000. [And the January jobs report was even worse than it looks...]
The Fed's responsibility is its policies' impact on domestic unemployment levels and inflation. A string of worsening jobs reports would give Yellen reason to engage in some kind of "stimulus."
For that reason, all eyes are now on the Labor Department's March jobs report.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.