Today, Janet Yellen appeared before the Senate Banking Committee to give her semi-annual monetary policy report to Congress. Her basic message, laid out in a prepared statement, hasn’t changed: the economy is slowly improving, but certain measures of the labor market still worry her. Since her last report to Congress in February,“important progress has been made in restoring the economy to health and in strengthening the financial system. Yet too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed.”
“Yellen’s testimony is likely to reinforce a sense of complacency among investors who regard the Fed as convinced of its forecast and committed to its policy course,” writesBinyamin Appelbaum. He continues that, with regard to the future of monetary policy, “uncertainty about the future is actually contributing to the sense of stability, by making the Fed more cautious about retreating.” Ylan Mui summarizes Yellen’s comments generally: “Move too fast or too abruptly, and the fragile recovery could falter.”
In the Q&A with senators, The WSJ (and a number of others) picked up this detail:
The Fed says house prices are within historic norms, as measured by price-to-rent ratios. However stock market valuations for small firms, social media and biotechnology firms “appear to be stretched.” Meantime risk spreads on corporate bonds have reached all-time lows, a sign of over-valuation.
To that, Cullen Roche writes, “despite being Fed Chief, Janet Yellen doesn’t understand the concept of ‘value’ relative to what is a proper ‘value’, any better than anyone else pretending to do so.” Neil Irwin says, “she sees some risks out there, though it’s clear she is not ready to sound an overall alarm bell over asset prices.” Reuters has a goodoverview of other interesting tidbits from the Q&A.
After reading the speech, Tim Duy thinks the next big policy battle at the Fed relates to the language it has been using about the amount of time between the ending of asset purchases (which we now know will be October 2014) and a change in the Fed funds rate (which is up in the air). It currently reads a “considerable time” or “considerable period.” However, he says, “it is no longer clear that a ‘considerable period’ between the end of asset purchases and the first rate hike remains a certainty.” Thus, Fed watchers should look for a change in that language in the future — just how soon, though, is up for debate. — Shane Ferro
On to today’s links: