A Fed Watcher’s Guide to Yellen Testimony: No Rush to Tighten
2014-07-15 04:19:14.610 GMT
By Steve Matthews
July 15 (Bloomberg) -- Here’s what to look for when Federal
Reserve Chair Janet Yellen testifies before the Senate Banking
Committee at 10 a.m. today and before the House Financial
Services Committee tomorrow.
* Sticking to policy: Yellen is likely to emphasize the need
to keep interest rates near zero for a considerable period,
even after a report this month showed unemployment fell to
an almost six-year low, said Carl Tannenbaum, chief
economist at Northern Trust Corp. in Chicago and a former
Chicago Fed economist
* Yellen will probably say that, while the jobless rate has
fallen faster than the Fed expected, the presence of part-
time and discouraged workers and long-term unemployed
“represents a reservoir of potential supply and accounts
for wages not growing rapidly at all,” Tannenbaum said in
an interview; “That will probably justify the message that
the Federal Reserve is in no rush to begin to raise interest
rates”
* Inflation outlook: While unemployment fell to 6.1% last
month and inflation has risen closer to the Fed’s 2% target,
“there is still too much uncertainty for her to change the
tone materially,” said Roberto Perli, a partner at
Cornerstone Macro in Washington
* Yellen will be questioned on the recent pickup in price
gains, Perli said; “She might say that it is too soon to
tell that inflation is about to take off,” he said; “She
will probably continue to buy time”
* Too-big-to-fail: Senator Elizabeth Warren, a Massachusetts
Democrat, may ask Yellen, as she did in February, about
progress ending the possibility of bailouts for large U.S.
financial institutions. “The-Too-Big-to-Fail debate will be
front and center in the hearings,” Keefe Bruyette & Woods
senior vice president Brian Gardner wrote in a report
* Kansas City Fed President Esther George, in comments in
Oklahoma last week, said, “I remain concerned that Too-Big-
to-Fail has not ended. We do not have a way yet to
effectively resolve these institutions”
* Community banker: Yellen also could be asked about the need
for a community banker on the Fed’s board of governors.
Senator David Vitter, a Republican from Louisiana, has
proposed requiring the Fed board have at least one member
with community banking or community-bank supervision
experience
* Policy rules: Yellen may be asked about a proposal by House
Republicans to limit how the Fed makes policy by requiring
the Federal Open Market Committee to describe a rule or
guideline for adjusting interest rates, said Diane Swonk,
chief economist at Mesirow Financial in Chicago; currently,
the Fed doesn’t bind itself to a formula, preferring
flexibility in an economy that continues to elude their
forecasts of where it is headed
* “They are looking to clip wings,” Swonk said; “She can
explain that policy is contingent on a potpourri of
variables. Simplistic rules don’t work in the post-crisis
economy”
* In a 2012 speech, Yellen said that while policy rules are
“a useful starting point in determining appropriate policy,
they by no means deserve the last word”
* Better data: Yellen’s prepared remarks will largely reflect
the economic assessment of the FOMC at its June meeting,
said Joseph Lavorgna, chief U.S. economist at Deutsche Bank
Securities in New York; her comments could be “modestly
more upbeat,” reflecting recent improved data, and “she
will acknowledge that progress has been made”
* Because her remarks reflect the views of the full FOMC,
“there is a risk she is less dovish than what the financial
markets assume are her underlying views,” he said
* Discussion of the labor market will emphasize continued
slack rather than the jobless rate, which she will indicate
is a “very incomplete measure of strength,” said Jonathan
Wright, an economics professor at Johns Hopkins University
in Baltimore who worked at the Fed’s division of monetary
affairs from 2004 until 2008
* Wages as key: “Chair Yellen and other key policymakers are
wedded to the idea that inflation can’t pick up unless wages
accelerate,” said Ian Shepherdson, chief economist at
Pantheon Macroeconomics Inc. in White Plains, New York; “We
expect no significant shift in view at Chair Yellen’s
testimony;” Average hourly earnings increased 2 percent in
the 12 months through June, Labor Department figures showed
* Exit discussion: Yellen is unlikely to go much beyond the
FOMC’s minutes in discussing the plans for an eventual exit
from record stimulus because “they are still being
finalized,” said Gennadiy Goldberg, U.S. strategist with TD
Securities in New York; minutes of the June meeting released
last week indicated FOMC members plan to use the interest
rate on excess bank reserves held at the Fed as the
principal tool for managing borrowing costs in the exit;
another tool, known as the overnight reverse repurchase
facility, would play a “supporting role,” according to the
minutes
* Asset bubbles: Yellen is likely to repeat her view that
financial-stability concerns shouldn’t prompt a change in
monetary policy, and supervision and regulation are the
primary means of dealing with asset-price bubbles, said
Wright; “She will pour cold water on the idea that
financial-stability conditions warrant tighter monetary
policy,” he said
For Related News and Information:
Federal Reserve links: FED <GO>
Credit crunch page: WWCC <GO>
Fed balance-sheet figures: ALLX FARW <GO>
Government relief programs: GGRP <GO>
Fed monetary policy: FOMC <GO>
--With assistance from Jeff Kearns, Craig Torres and Cheyenne
Hopkins in Washington.
To contact the reporter on this story:
Steve Matthews in Atlanta at +1-404-507-1310 or
smatthews@bloomberg.net
To contact the editors responsible for this story:
Chris Wellisz at +1-202-624-1862 or
cwellisz@bloomberg.net
Mark Rohner
2014-07-15 04:19:14.610 GMT
By Steve Matthews
July 15 (Bloomberg) -- Here’s what to look for when Federal
Reserve Chair Janet Yellen testifies before the Senate Banking
Committee at 10 a.m. today and before the House Financial
Services Committee tomorrow.
* Sticking to policy: Yellen is likely to emphasize the need
to keep interest rates near zero for a considerable period,
even after a report this month showed unemployment fell to
an almost six-year low, said Carl Tannenbaum, chief
economist at Northern Trust Corp. in Chicago and a former
Chicago Fed economist
* Yellen will probably say that, while the jobless rate has
fallen faster than the Fed expected, the presence of part-
time and discouraged workers and long-term unemployed
“represents a reservoir of potential supply and accounts
for wages not growing rapidly at all,” Tannenbaum said in
an interview; “That will probably justify the message that
the Federal Reserve is in no rush to begin to raise interest
rates”
* Inflation outlook: While unemployment fell to 6.1% last
month and inflation has risen closer to the Fed’s 2% target,
“there is still too much uncertainty for her to change the
tone materially,” said Roberto Perli, a partner at
Cornerstone Macro in Washington
* Yellen will be questioned on the recent pickup in price
gains, Perli said; “She might say that it is too soon to
tell that inflation is about to take off,” he said; “She
will probably continue to buy time”
* Too-big-to-fail: Senator Elizabeth Warren, a Massachusetts
Democrat, may ask Yellen, as she did in February, about
progress ending the possibility of bailouts for large U.S.
financial institutions. “The-Too-Big-to-Fail debate will be
front and center in the hearings,” Keefe Bruyette & Woods
senior vice president Brian Gardner wrote in a report
* Kansas City Fed President Esther George, in comments in
Oklahoma last week, said, “I remain concerned that Too-Big-
to-Fail has not ended. We do not have a way yet to
effectively resolve these institutions”
* Community banker: Yellen also could be asked about the need
for a community banker on the Fed’s board of governors.
Senator David Vitter, a Republican from Louisiana, has
proposed requiring the Fed board have at least one member
with community banking or community-bank supervision
experience
* Policy rules: Yellen may be asked about a proposal by House
Republicans to limit how the Fed makes policy by requiring
the Federal Open Market Committee to describe a rule or
guideline for adjusting interest rates, said Diane Swonk,
chief economist at Mesirow Financial in Chicago; currently,
the Fed doesn’t bind itself to a formula, preferring
flexibility in an economy that continues to elude their
forecasts of where it is headed
* “They are looking to clip wings,” Swonk said; “She can
explain that policy is contingent on a potpourri of
variables. Simplistic rules don’t work in the post-crisis
economy”
* In a 2012 speech, Yellen said that while policy rules are
“a useful starting point in determining appropriate policy,
they by no means deserve the last word”
* Better data: Yellen’s prepared remarks will largely reflect
the economic assessment of the FOMC at its June meeting,
said Joseph Lavorgna, chief U.S. economist at Deutsche Bank
Securities in New York; her comments could be “modestly
more upbeat,” reflecting recent improved data, and “she
will acknowledge that progress has been made”
* Because her remarks reflect the views of the full FOMC,
“there is a risk she is less dovish than what the financial
markets assume are her underlying views,” he said
* Discussion of the labor market will emphasize continued
slack rather than the jobless rate, which she will indicate
is a “very incomplete measure of strength,” said Jonathan
Wright, an economics professor at Johns Hopkins University
in Baltimore who worked at the Fed’s division of monetary
affairs from 2004 until 2008
* Wages as key: “Chair Yellen and other key policymakers are
wedded to the idea that inflation can’t pick up unless wages
accelerate,” said Ian Shepherdson, chief economist at
Pantheon Macroeconomics Inc. in White Plains, New York; “We
expect no significant shift in view at Chair Yellen’s
testimony;” Average hourly earnings increased 2 percent in
the 12 months through June, Labor Department figures showed
* Exit discussion: Yellen is unlikely to go much beyond the
FOMC’s minutes in discussing the plans for an eventual exit
from record stimulus because “they are still being
finalized,” said Gennadiy Goldberg, U.S. strategist with TD
Securities in New York; minutes of the June meeting released
last week indicated FOMC members plan to use the interest
rate on excess bank reserves held at the Fed as the
principal tool for managing borrowing costs in the exit;
another tool, known as the overnight reverse repurchase
facility, would play a “supporting role,” according to the
minutes
* Asset bubbles: Yellen is likely to repeat her view that
financial-stability concerns shouldn’t prompt a change in
monetary policy, and supervision and regulation are the
primary means of dealing with asset-price bubbles, said
Wright; “She will pour cold water on the idea that
financial-stability conditions warrant tighter monetary
policy,” he said
For Related News and Information:
Federal Reserve links: FED <GO>
Credit crunch page: WWCC <GO>
Fed balance-sheet figures: ALLX FARW <GO>
Government relief programs: GGRP <GO>
Fed monetary policy: FOMC <GO>
--With assistance from Jeff Kearns, Craig Torres and Cheyenne
Hopkins in Washington.
To contact the reporter on this story:
Steve Matthews in Atlanta at +1-404-507-1310 or
smatthews@bloomberg.net
To contact the editors responsible for this story:
Chris Wellisz at +1-202-624-1862 or
cwellisz@bloomberg.net
Mark Rohner