Whenever the Chairman of the Federal Reserve appears before Congress, the financial press scrutinizes every phrase, analogy and statement in an attempt to divine even the slightest change in Fed policy. The potential for market moving statements increases significantly once the chairman’s prepared remarks are concluded and the committee members’ questioning begins.
Alan Greenspan was a master of the compound sentence and the ability to avoid expanding upon his prepared remarks. Ben Bernanke stumbled early on but soon became extremely adept at pausing to compose his response to often hostile grandstanding senators and congressmen and then sticking closely to the points he outlined in his prepared remarks. So how did Janet Yellen fair in her first appearance before the Senate Banking Committee as Chairman? By all appearances she avoided any significant mis-steps and demonstrated her strong qualifications for the position she now holds. But as always, it is useful to review the chairman’s testimony and responses to find some of the Fed’s finer policy shifts.
First, we note that when questioned, Chairman Yellen established her independence from the current administration. When asked about the Obama administration’s efforts to raise the minimum wage to $10.10 she deferred to the Congressional Budget Office study of the subject stating, “CBO is qualified as anyone to evaluate the literature and I wouldn’t want to argue with their assessment.” When questioned on the subject of fiscal stimulus she indicated that while less fiscal restraint in the short run could be beneficial she would not endorse fiscal stimulus without an effort to reduce long term deficits. She also pointed out that with the drag of fiscal policy the job of monetary policy is more difficult.
On specific policy issues Chairman Yellen backed away from the 6.5% level of unemployment as being significant noting that there still are a large number of underemployed workers. This coupled with her indication that the Fed was not wedded to a specific schedule for winding down asset purchases buoyed the stock market. While the chairman stated that Bank capital requirements were “high on the agenda,” she also pointed out that the Fed was looking to minimize the burden on community banks. This we would interpret as an assurance that the Fed was going to keep regulatory pressure on ‘Wall Street’ while assuring the members of the committee that the banks in their home states would not be faced with increased compliance costs or regulatory scrutiny.
As for the secured financing and related markets, there were some points of keen interest. On the subject of lowering the rate paid on excess overnight reserves, Yellen stated that although it might be a move in the right direction she saw felt that it would have very little impact on bank lending. On FNMA and FHLMC the Chairman Yellen stated, “I strongly support and would urge Congress to address the issue of GSE reform. We have gotten a mortgage system that in a way remains very highly dependent on government backing and it fails to meet the very important objective of successful securitization without systemic risk.” Finally, speaking about the Fed’s fixed rate repo program the chairman noted that the Fed wanted to be able to “firmly control” short term interest rates when the time comes to tighten interest rate policy. Further, she stated that the Fed is considering targeting the “repo rate” as a more effective tool that Fed funds for managing interest rates.
We would emphasis these last two points as being closely in line with our writing over the last several months. The Fed has now endorsed the value of the secured funding market as a lever to influence monetary policy.