Saturday, February 13, 2016

Five Key Takeaways from Yellen's Monetary Policy Testimony

Federal Reserve Chair Janet Yellen testified on Capitol Hill on Wednesday and Thursday.
Five Takeaways from Yellen's Testimony She appeared before the House Financial Services Committee and the Senate Banking Committee. We attended both hearings. Here are the key points:

1. An undercurrent of protest from both the left and the right (Google #whoserecovery) is beginning to have an impact on monetary policy. See the photo above of protesters at both hearings. We have issues with both the left and right wing versions. The right is simply crazy. The left is financed by labor unions. I can guarantee that none of the black folks in the photo of protestors at the hearings below are well paid. Their labor union managers, most of whom are white, are. (Can you say rock and a hard place?)

2. At the start of the Senate Banking Committee hearing, Senate Banking Committee Chairman Richard Shelby unveiled a letter from 30 economists who support implementation of the Taylor Rule, a mechanical approach to monetary policy that sets limits on the ability of a central bank to respond to economic conditions. We note two things:
  • Not one of these economists accurately predicted the financial crisis. (We did, BTW.)
  • Ms. Yellen pointed out that no central bank anywhere in the world uses the "Taylor Rule" or anything like it. None. This should be enough to end the conversation. It won't.
3. The Fed's current balance sheets equals 20% of the U.S. economy. In essence, the Fed stepped in to rescue the economy. From our perspective,  this confirms, as the Chair noted, that Fed independence and Fed accountability are NOT mutually exclusive.

4. When Senate Banking Committee Ranking Member Sherrod Brown asked for information on which groups (by race, gender and sector) have fared better during the recovery, Ms. Yellen indicated she had no data on which to base a response. She then went on to claim that most of the benefits of the economic recovery have flowed to the better educated portion of the workforce. Again she has no data to support this contention. Thus, her statement is both unscientific and prejudicial.

5. Her key statements on current economic conditions and monetary policy are as follows:
  • Financial conditions are less supportive of growth. Both the dollar and interest rates are up, and lower oil prices do not seem to be meaningfully impacting growth prospects. 
  • The recovery in the housing sector is ongoing. Prices, and activity are both up. 
  • Consolidation in the banking industry is also ongoing. This results in fewer and fewer banks, less competition, and less beneficial terms for bank customers. (We suggest people start looking at Credit Unions..)
  • The Fed looked at implementing negative interest rates (that's where you pay the bank to hold your money..) but rejected this approach. The Fed is taking a fresh look at implementing monetary policy that implements negative interest rates, however.
  • She noted that economic "expansions do not die of old age." They die because of policy mistakes. We agree.