Yellen Debuts as Fed Chair

By Mark Sorgenfrei Jr.

For the first time since 2006, someone not named Ben Bernanke testified before the House Financial Services Committee as Chair of the Board of Governors of the Federal Reserve System. Dr. Janet Yellen officially assumed the post on Feb. 3.

As evidenced by the Federal Reserve’s balance sheet ballooning from less than $1 trillion to $4 trillion under Ben Bernande’s leadership, monetary policy has become the primary tool to influence this recent economic recovery in the absence of expansionary fiscal policy (see our writings from last week for further discussion of this relationship). Because of this strong central bank intervention environment, the transition from Bernanke to Yellen is arguably one of the most important handoffs of the Fed chair in history. Will Yellen be able to successfully navigate the transition from an accommodative monetary policy to a more restrictive one? Her testimony on Capitol Hill last week provided the opportunity to either rattle or mollify financial markets.

From her prepared opening remarks, here are some of the more relevant nuggets:

“Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high. These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.”

“Inflation remained low as the economy picked up strength...”

“…let me emphasize that I expect a great deal of continuity in the FOMC’s approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy...”

“The Committee has emphasized that a highly accommodative policy will remain appropriate for a considerable time after asset purchases end.”

To summarize, Yellen reiterated that while the job market is improving, there are still underlying areas of concern within that market. Therefore, the Fed will not focus solely on the unemployment rate, but other labor market factors will also influence its decisions. Inflation remains well below a danger zone, and the Bernanke-Yellen Fed continues to err on the side of caution by avoiding a deflationary trap. Finally, and perhaps most importantly, Yellen’s Fed’s policies will be more or less a continuation of the Bernanke Fed. While the Fed will continue its gradual tapering of asset purchases (remember that they have moved from $85 billion/month to the current $65 billion/month), that tapering commitment remains flexible. Furthermore, even when the taper is complete, additional monetary support is expected to be provided via other tools. Of course, better than expected economic data could change these plans, and a Fed that is too accommodative for too long can stoke inflation. For now, that is not a present problem.

Yellen mollified, rather than rattled, the financial markets, as the Dow Jones Industrial Average on Tuesday of last week posted its largest point and percentage gain of the year. Welcome aboard, Janet Yellen!

Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.