US Fed’s Yellen: No Change on Forward Guidance, Labour Markets Hurting

In her first public appearance on Capitol Hill as confirmed head of the US Federal Reserve Board, Chair Janet Yellen spoke before the US House Financial Services Committee last week. Delivering the Fed’s semiannual monetary policy report to Congress, Yellen took questions from all committee members, lasting just short of six hours – an arrangement she agreed on beforehand.

Key to her testimony was her expectation for “a great deal of continuity” toward the monetary policy decisions made under her predecessor, Ben Bernanke. In expressing no new change to Fed forward guidance, she dismissed claims that recent emerging market tremors were the outcome of Fed reductions in its monthly asset-purchase programme. “A few adverse developments – including a weaker-than-expected reading on Chinese manufacturing, a devaluation of the Argentine peso, and Turkey’s intervention to support its currency – triggered renewed turbulence in emerging markets,” Yellen said in her testimony.

The Senate Banking Committee had also scheduled her later in the week, but has since postponed it due to inclement weather in Washington. The historic weight of her appointment as the first female to lead the central bank brought Yellen enormous praise during her House hearing.  

House Financial Service chairman Jeb Hensarling (Republican, Texas) opened with request that Yellen begin her tenure by ending the current threshold of unemployment above 6.5% with inflation under 2.5% that guides Fed interest rate policy. Yellen reiterated the position of the Federal Open Market Committee (FOMC) from its previous meetings that accommodative interest rates would hold “well past the time” of the current target. “The recovery in the labour market is far from complete,” she emphasised in her opening remarks.

On recent weak US employment data, Yellen expressed surprise, but stopped short of alarm. “We have to be careful about jumping to conclusions,” she said, suggesting there is still large amount of ‘slack’ in labour markets that would constitute a more cyclical than structural unemployment threat, as it relates to contraction in labour force participation. “It is important to take our time to assess what the significance is,” Yellen said.

Representative Carolyn Maloney, Democrat from New York, pushed her on offering a scenario where the Fed might pause monthly reductions in its bond-buying – or even increase purchases. Only in the case of a “significant deterioration” in economic outlook or signs of deflation would such considerations be made, Yellen replied.

The committee questioned Yellen on the Fed’s authority overseeing financial stability and its role on the Financial Stability Oversight Council (FSOC), the interagency panel in charge of financial stability. Of particular interest to the panel was finalisation of the Volcker Rule, which bans federally-insured US banks from certain proprietary trading practices, and rules governing nonbank systemically important financial institution (SIFI) designees.

The Volcker rules was voted on and adopted last December by the five financial regulators responsible for enforcing it and now due to take effect in 2015. Members from both political parties expressed concern about the rule’s impact on collateralised loan obligations (CLOs), which are packaged high-risk corporate loans that generally offer higher yields than corporate bonds.

In early-February, Fed governor Daniel Tarullo testified to the same committee that unease about CLOs has them “at the top of the list” for consideration. When asked on Tuesday, the newly-confirmed Fed chair affirmed that she and her colleagues will look into the rule’s effect on CLOs.

To concerns from panel members about the treatment of nonbanks designated systemically important, notably insurance companies, Yellen assured that rules would be devised reasonably to respective institutions. She added that “We do face constraints in our ability to do that because the Collins Amendment requires us to establish consolidated minimum risk-based leverage and capital requirements to these entities that are no lower than those that apply to depository institutions.”

Yellen’s first testimony as chairperson to the Fed conveyed a candidness fairly unusual to central bankers.  During her questioning, Representative Shelley Moore Capito (Republican,West Virginia) thanked Yellen for being more plain-spoken than previous Fed chairs. Yellen delivered her testimony and responded to questions from committee members with an expressed clarity that reflects her well-established efforts to create a more open, transparent Federal Reserve.

“I believe that I am a sensible central banker,” Yellen remarked. “These are very unusual times” by which monetary policy must respond accordingly and forward guidance should be “as systematic and predictable as we can possibly be.”


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