Federal Reserve Chair nominee Janet Yellen’s well-handled testimony just ending before the Senate Banking Committee can best be summarized in just three words, “vote for me!”
Yellen’s overall tone was as dovish as could be expected, and as was intended. But she carefully steered clear of any near term policy signals or market disrupting messaging slips, keeping her focus on the targeted audience, the 22 Senators sitting before her who will be voting whether to send her confirmation on to the full Senate.
*** On QE, she stressed it has to date clearly worked in helping to support growth, and that its benefits still outweigh the costs that the Fed is nevertheless closely monitoring. And, as expected, she repeated that it won’t last forever (another shot to silence the QE forever chatter) but otherwise went out of her way to avoid giving any hints at a near term timetable. ***
*** A confirmation testimony is hardly the venue for the finer nuances of near term policy messaging, which dictated that Yellen pretty much stuck to what we had been describing as a “constructive ambiguity” in stressing only in general terms how amply accommodative monetary policy will be rather than going into the distinction of the contributions between the two policy tools of bond buying and forward guidance on rates. ***
*** That said, we do continue to expect the “changing the mix” and reinforcing of the forward guidance to remain the most important communications on policy going forward. As much as a minimum of decent data, the Fed’s confidence that its rates guidance is being embraced in market expectations and pricing will frame the tactical decision on when to begin QE tapering, which we think could still come as soon as December, however low its probability, but no later than March. All told, for the Fed – doves as well as the hawkish – the current open-ended regime will tally at a stock of accommodation of around $1.2 trillion. ***
Deftly Handled Testimony
Yellen deftly handled her testimony both in content and above all style. We were, in fact, if anything a bit surprised how gently the Republican Senators put their toughest questions to her, including the sharpest questions from Tennessee’s Bob Corker, Alabama’s Richard Shelby, and Pennsylvania’s Pat Toomey. Republicans and Democrats alike, especially Massachusetts’ Elizabeth Warren, who got her licks in on the big banks, pressed hardest on regulatory rather than monetary policy issues.
She was reasonably optimistic on the outlook, noting a recovery that is even showing momentum despite the fiscal drag, “Some of the near-term term reductions in spending that we have seen have certainly detracted from the momentum of the economy and demand” (hint, hint).
Yellen mostly danced around the asset bubble questions, though twice vowing a single answer “no” when asked whether the stock market is in a bubble or if there is a federal role in supporting the stock market. Both those neat sound bites will no doubt be played endlessly on CNBC when the market soars ever upward or swoons sharply.
On more narrow subjects, she also seemed to downplay any near term prospect of lowering the Interest Rate on Excess Reserves.
One of our favorite moments was her barely disguised bemusement in handling the baffling question about gold by Nevada Republican Dean Heller. Another was the way she handled the incoherent question from Nebraska Republican Mike Johanns whether she would agree “if the Fed announced its drawing down its balance sheet to zero over the next two years, that real estate and the stock market would fall in value?”
Um, yes, along with the collapse of all assets and all economies the world over!
We do expect Yellen to win 14 or more Committee yeas, including two or more Republican, when the Committee votes on her confirmation some time before Thanksgiving. And while there is some risk Republican-threatened holds or filibusters could cause up to six days of delays in a very tight December Senate schedule, we do still expect Yellen to be easily confirmed, picking up at least 66 or more votes.