Watch Live: Janet Yellen And Mervyn King At NYU

The NYU Stern school of business is hosting the latest installment of the "In Conversation with Mervyn King" series featuring outgoing Fed chair, ?Janet Yellen, who in just over two months, will depart the Fed, making way for her replacement, former Carlyle partner Jay Powell.

While her speech is not expected to provide any market-moving revelations, it will be one of her last public appearances, and as such she is expected to give her perspective on the "4 rate hikes in 2015" fiasco, how central-planning and bubble blowing has changed over the past 4 years, and also her outlook on how this entire experiment in monetary insanity ends.

Enjoy.

NY Fed President Bill Dudley Retiring

The Federal Reserve"s "smooth transition" from Janet Yellen to Jay Powell is set for a major speedbump.

Just two short days after Donald Trump confirmed what weekly trial balloons had reported for weeks, namely that Janet Yellen is being replaced with most "dovish" alternative possible in the face of former Carlyle partner and 5 year Fed governor Jerome Powell, the person who according to some is even more instrumental to Fed policy than Janet Yellen, NY Fed president Bill Dudley is reportedly leaving.

Late on Saturday evening, CNBC"s Steve Liesman reported that Fed vice chairman Bill Dudley, a former Goldman managing director and chief economist, not to mention a key figure in "the unprecedented government response to the financial crisis", is set to join Janet Yellen among the ranks of the unemployed (if only until he hits the speaking circuit and writes a book explaining that the Fed is the cause of the world"s problems) and announce his retirement as soon as next week. 

Dudley, who has has headed the bank since 2009, will likely retire sometime in the spring or summer of 2018 when his replacement is found and approved, sources told CNBC. His term ends in January 2019. A search committee has already been formed.

According to Liesman, Dudley told several colleagues he was planning to leave in 2018, "and his departure is said not to be related to the decision last week by President Donald Trump to name Fed Governor Jerome Powell as the next Fed Chairman." Which probably means that Dudley"s departure is precisely that: a protest against Trump"s removal of Yellen with whom Dudley had a pristine relationship.

Dudley, set to turn 65 next year, became NY Fed president in the immediate aftermath of the Great Financial Crisis and was instrumental in devising the Fed"s ZIRP and QE policies.

As president of the New York Fed, Dudley holds a special spot among the dozen regional bank presidents. The incumbent always serves as vice chairman of the rate-setting Federal Open Market Committee (FOMC) and always votes at policy meetings, while other regional presidents have a rotating vote. More importantly, before he became NY Fed president, Dudley headed the New York Fed"s markets group - also known elsewhere as "the plunge protection team" - which Liesman describes as "a critical job that oversees the trades and market operations required to set the Federal Funds Rate." Liesman is right.

In both positions, Dudley was a principal player in Fed decisions concerning the demise of Lehman Brothers, AIG and Bear Stearns, along with emergency measures taken by the central bank to stanch a meltdown in the financial system.

Dudley"s "list of accomplishments" is long: several trillion dollars long in fact. Under the former Goldman executive, the NY Fed was responsible for accumulating the trillions in assets the Fed purchased under QE, bringing its balance sheet up to $4.5 trillion. It is now responsible for the market operations underway to reduce the balance sheet.

Dudley"s departure comes at a time of dramatic change at the Fed. in addition to a new Fed Chairman, Vice Chairman Stan Fischer left his post in October, and there are currently three open seats on the seven-member Board of Governors. That number may rise to four if Yellen leaves the board when Powell is confirmed, and before others are nominated and confirmed by the Senate.

The choice of Dudley"s replacement will be made by the New York Fed"s Board of Directors and approved by the Federal Reserve Board. Dudley is expected to speak at the economic club of new York at noon on monday.

With Dudley"s departure, the Fed will lose one of its more prominent centrists as the following Dove-Hawk ranking from Barclays shows.

As for new Fed chair Jay Powell, while many already had a low opinion of him being able to keep the system together once the next crash happens, the departure of a key Fed veteran such as Bill Dudley will only make it that much more complicated to preserve stability in the not too distant future. Here are some scathing thoughts from Capital Economics on Powell"s tenure as next Fed chair:

Powell an underwhelming choice to be Fed Chair

• Some are born great, some achieve greatness and some have greatness thrust upon them. Jerome Powell belongs in the third category. President Donald Trump’s nomination of Powell to be the next Fed Chair is an underwhelming choice. The Fed will face many difficult challenges over the next few years and it is unclear whether Powell has the skills to navigate them.


• The polite thing to do would be to offer some platitudes about Powell being the ‘safe’ choice, who will provide continuity with the Yellen-led Fed’s monetary policy approach of gradually normalising interest rates and might be more inclined to loosen financial regulation. That said, although Powell is more open to deregulation than Yellen, he is hardly a free market zealot. He has expressed support for simplifying and “recalibrating” regulation, particularly the Volcker rule but, at the same time, he has warned that “it is essential that we protect the core elements of these reforms for our most systemic firms in capital and liquidity, stress testing and resolution”. At least financial markets will be comforted that Trump didn’t pick the potentially much more hawkish John Taylor or Kevin Warsh.


• Nevertheless, Powell’s resume is not up to the standards we would expect of a nominee for Fed Chair. For a start, unlike the last three Fed Chairs, he is a lawyer rather than an academically trained economist. His other experience is in investment banking and private equity. He also spent some time at the Bipartisan Policy Center and worked in the Treasury for a couple of years during the Bush Snr administration. None of those roles marked him out to be the next leader of the world’s most important central bank.


• Powell was only nominated to join the Fed’s Board of Governors in 2011 because then-President Barack Obama needed a token Republican to ease the accompanying nomination of Jeremy Stein through the Republican-controlled Senate. Since joining the Board, Powell has had little to say of any interest. His speeches have focused on regulatory issues and when he has spoken about monetary policy issues, he has been careful never to deviate from the in-house view. Not surprisingly, markets initially didn’t see Powell as a possible candidate to be Fed Chair.


• Admittedly, we could be wrong about Powell. He is still something of an enigma and he may emerge as a strong leader with a firm grasp of monetary and economic issues. His Senate nomination hearing in the coming months will provide the first insight into what type of Fed Chair he will be. Regardless of his performance at the hearing, however, we expect him to be confirmed without too much drama.


• There is an argument to be made that Powell’s market experience could prove to be crucial in the coming years. But there are potentially even bigger challenges ahead. As an institution, the Fed is grappling with the most fundamental question of what drives inflation in the modern US economy, as it seeks to explain why it has been unable to hit its 2% inflation target consistently. Should the Fed stick with the orthodox Phillips curve view that shrinking slack in the labour market and wider economy will eventually generate an acceleration in wage and price growth or abandon that framework? If the Fed does abandon it, what becomes the working model of inflation? Inflation expectations? Does inflation targeting even make any sense in a world where interest rates influence domestic activity and employment, but activity and employment don’t influence prices? Monetary targeting was abandoned because the old relationships with prices broke down. Inflation targeting isn’t sacrosanct. We would feel more comfortable if it was the academically outstanding economist Janet Yellen who was leading that research, particularly when she had the benefit of the strong intellect and experience of Vice Chair Stanley Fischer at her side.


• Powell’s nomination means that we still expect the Fed to raise interest rates once more this year and then four times next year. That is slightly more hawkish than the FOMC’s own projections imply, but those forecasts don’t appear to factor in a fiscal stimulus. Beyond that, a lot still depends on who Trump picks to fill the other vacancies on the Fed’s Board. With Powell’s promotion, there will be four vacancies, including the Vice Chair position. Otherwise, the risk of a serious policy mistake – in either direction – will arguably be higher under Powell’s leadership than under Yellen’s. And policy communications may become more muddled, if Powell doesn’t provide strong intellectual leadership and the policy debate descends into a free-for-all among regional Fed Presidents.

Watch Live: Janet Yellen Addresses Community Bankers

Since Janet Yellen last spoke (shifting hawkish), the dollar and bond yields have surged (as have the odds of a Dec rate-hike).

Since Yellen last spoke...

It is unclear whether today"s opening remarks at the fifth annual Community Banking in the 21st Century conference at the Federal Reserve Bank of St. Louis, will offer any new insights on monetary policy direction but given President Trump"s "shortlist", it may well be among her last public appearances as Fed Chair.

Notably, James Bullard, head of the Federal Reserve Bank of St. Louis is also speaking at this event, so there is always room for some uber-dovishness if Yellen tilts further hawkish.

Live Feed (Unfortunately no embed is available so click the image below for a link to Bloomberg"s live feed):

Yields Slide As Market Smells A Squeeze On Powell Fed Chair Chatter

Having noted earlier the 44%, or 11-year high, in short Treasury positions among all bond traders (according to the latest JPM client survey), and a record high 70% among JPM"s "active" clients, we suggested that the most likely next move in the Treasury sector is a squeeze on even the faintest news that derails the recent hawkish narrative. And, predictably if aonly for now, this morning Treasuries have ground higher, with 10-year note futures matching Asia session highs, and the yield on the 10Y sliding to session lows of 2.33%.

What about the catalyst?

It appears that the news that spooked the weaker shorts into covering this morning is a rerun of a story from Politico that contrary to last week"s speculation that noted Fed "maverick hawk" Kevin Warsh is the frontrunner to replace Janet Yellen, that honor may fall to Fed governor Jerome Powell, a far more "dovish" candidate who, unlike Warsh, has never lashed out at the Fed"s policies and who is the favored candidate of Treasury Secretary Steven Mnuchin. As a reminder, Treasuries tumbled last week following the widely circulated report that Trump was said to meet Warsh about Fed chair position, suggesting he was the President"s preferred candidate. As Politico notes, that may not be the case:

MM spoke to a couple of other sources close to the Fed Chair selection process and they confirmed Kevin Warsh and Jerome Powell as the current front-runners with Treasury Secretary Steven Mnuchin said to be favoring Powell. That’s something of a head scratcher to outside observers of the process who did not have Powell on short-lists before the process began. Warsh was always viewed as a top contender though he does not really know President Trump.

These sources also said that Trump’s comment that he could make a decision in “two or three weeks” was not really a throwaway line and that the president really could tap someone in that short a time-frame. Or it could take a couple of months. It’s really up to the president to make a decision. The vetting process for the finalists is evidently very far along. Obviously some of the other final candidates including NEC Director Gary Cohn and current Fed Chair Janet Yellen are already heavily vetted and have all their paperwork in place.

Add to this what we noted earlier, and what Bloomberg"s Edward Bolingbroke wrote this morning, namely that as a result of the extreme short positioning in the TSY space, the "the market leaves Treasuries open for short squeeze-driven gains", and one can explain today"s sharp move lower in TSY yields.

Then again, the squeeze may be short-lived, because if one trusts the online betting market, despite the chatter of Mnuchin"s support for the "conventional" Jerome Powell, Warsh remains a distant favorite even after the Politico report, with a 42% probability of being Yellen"s replacement, more than Powell, whose latest contract has jumped to 35% (+8 on the day), with Yellen and Cohn a distant 3rd and 4th, with 18% and11% respectively. The latest rack from PredictIt:

Is The Yellen Fed Planning To Sabotage Trump's Presidency?

Authored by Stefan Gleason via Money Metals Exchange,

The Federal Reserve can make or break a president.

Monetary policy influences all financial markets as well as the cycles in the economy. No president wants to have to run for re-election when the stock market and economy are turning down.

Recall that President George H.W. Bush was sitting on sky-high job approval numbers in 1991 and was expected to coast to victory in his 1992 re-election bid. But then the economy swooned toward recession, giving Bill Clinton the opening he needed.

Bush later blamed Federal Reserve chairman Alan Greenspan for his defeat. Greenspan had held interest rates too high for too long, Bush complained.

On the campaign trail in 2016, Donald Trump complained that Fed chair Janet Yellen was trying to help Hillary Clinton by keeping rates near zero and pumping up the stock market with liquidity.

“They"re keeping the rates artificially low so that Obama can go out and play golf in January and say that he did a good job... It"s a very false economy,” Trump told reporters in September 2016.

Later that month in the second presidential debate, he declared, “We are in a big, fat, ugly bubble. . . The only thing that looks good is the stock market. But if you raise interest rates even a little bit, that"s going to come crashing down.”

Reappointing Janet Yellen Could Be Politically Dangerous to Trump

Now that he’s president, Trump may have become the stock market bubble’s most high-profile cheerleader. He certainly doesn’t want it to burst on his watch.

The president has warmed up to Yellen’s Dow-friendly easy money policies. He even suggested he might reappoint her to the Federal Reserve in early 2018.

That would be a politically dangerous move. The Fed could help determine which party has the advantage in the 2018 mid-terms and the 2020 presidential election beyond that.

Of course, Fed officials insist they are “data driven” and don’t make policy decisions based on politics. Whether they intend to be or not, Fed policymakers are inevitably involved in politics. The members of the Federal Reserve Board are political appointees.

Yellen is a liberal Democrat, appointed by President Obama. She understands what’s at stake in the upcoming elections. She understands that Democrats are in a state of political desperation right now. They hold only 15 governorships, are a minority in Congress, and stand to be steadily replaced in the courts. But they STILL control the Federal Reserve Board.

President Trump now has the opportunity to re-shape the Fed. Three of the seven positions on the Federal Reserve Board remain vacant. Trump can fill them. More importantly, he can replace Yellen as Fed chair next year.

Fed Moves Could Crash the Stock Market, Hurting Republicans in 2018

It’s understandable that Trump is playing nice with Yellen while she’s helping keep things seemingly peachy keen in the markets. But the consequences of the Fed’s balance sheet “normalization” program may start to be fully felt next year. He shouldn’t underestimate the risks of the bubble he identified in 2016 bursting in time for the elections in 2018.

This year’s mid-terms will be of particular concern to Fed officials. Republicans have a shot at expanding their majority in the Senate and finally being able to pass conservative legislation – including potentially an audit and reforms of the Federal Reserve system.

In recent years, GOP reformers in Congress have pushed bills that would force the Fed to adhere to a rules-based formula for setting its target interest rate. That would help remove political conflicts of interest from policy decisions and make them less impactful on markets.

Right now, any major monetary reform efforts would be met with insurmountable resistance by the keepers of the center-left status quo in the U.S. Senate. Yes, despite Republicans having a nominal majority in the Senate, conservatives are in the minority. That became abundantly clear when a pair of liberal Republicans joined anti-Trump establishmentarian John McCain in voting to save Obamacare from being repealed.

Trump’s Priorities to Be Stymied Unless GOP Gains Seats

It’s likely that none of Trump’s legislative priorities – from healthcare, to immigration, to taxes – will ever make it to his desk to become law. Unless conservative/libertarian-leaning Republicans hold onto the House and gain some Senate seats in 2018.

Mid-terms typically result in net losses for the party that controls the White House. Democrats might be feeling good about their odds of winning back full control of the Senate... except for the fact they face a big structural disadvantage this time around.

Democrats must defend 25 Senate seats in 2018, while Republicans only have to put 9 on the line. GOP strategists see an opportunity to expand their majority by knocking off vulnerable Democrat incumbents in Indiana, Missouri, Montana, North Dakota, and West Virginia – states that swung heavily for Trump in 2016.

The question is: Will the economic backdrop be favorable for Republicans to campaign on the Trump agenda? That remains to be seen.

Given the stakes, Donald Trump’s hiring decisions at the Fed could make or break his presidency.

Gary Cohn "Would Love To Be" Next Fed Chairman: Report

One month ago we reported that according to Beacon Policy Advisors, a new name had emerged as potential replacement to Janet Yellen as head of the Federal Reserve: that of former Goldman COO and current Trump National Economic Council advisor Gary Cohn.

"The buzz among those who claim Cohn confides in them is that he would like to eventually replace" Yellen, assuming Trump decides to move in a different direction when the chair"s term ends in early February, Beacon Policy Advisors said in a daily report for clients in late April.

"On paper, Cohn likely meets Trump"s expected top two requirements for a Fed chair candidate," the Beacon analysis said, specifically citing Cohn"s advocacy for deregulation and his likelihood to keep interest rates low as Trump seeks to implement his pro-growth economic policies.

Now, as Axios reports, this story is being validated by none other than Gary Cohn"s inner circle. According to Mike Allen a shake-up of the White House staff has put Cohn in contention to replace Reince Priebus as chief of staff. While such a move had long been speculated, Allen added that a late surge in support among confidants of Trump could lead GOP lobbyist David Urban to get the job.

However, as Axios notes, citing Cohn"s Friends "after his current gig, Cohn would love to be named ... chair of the Federal Reserve."

As a reminder, Janet Yellen"s term as Fed chair expires in February 2018. And while their relationship has been far less contentious recently, during his presidential campaign, Trump accused Yellen of collaborating with President Barack Obama and Democrats to keep interest rates low to ensure a victory for his competitor Hillary Clinton. His personal attacks led to speculation that he could even fire Yellen if he won. Since then, however, Trump has had a change of heart, and during an April WSJ interview, he stated that lower rates are in fact prefereable and said he may even reappoint Yellen.

Of course, if Cohn were appointed Fed chair it would add yet another person with Goldman Sachs ties to the Federal Reserve"s key positions. Cohn was Goldman"s president and COO before leaving to join the Trump administration.

Below we list some prominent former Goldman employees currently employed by the Federal Reserve:

• New York Fed president, William Dudley, previously Goldman"s chief economist


• Minnesota Fed president, Neel Kashkari, previously worked at Goldman


• Philadelphia Fed president, Patrick Harker, previously a former trustee of the Goldman Sachs Trust


• Dallas Fed president, Robert Kaplan, previously vice chairman at Goldman in charge of investment-banking operations.

Ron Paul Rages "The Federal Reserve Is, and Always Has Been, Politicized"

Authored by Ron Paul via The Ron Paul Institute for Peace and Prosperity,

Audit the Fed recently took a step closer to becoming law, when it was favorably reported by the House Committee on Oversight and Government Reform. This means the House could vote on the bill at any time. The bill passed by voice vote without any objections, although Fed defenders did launch hysterical attacks on the bill during the debate as well as at a hearing on the bill the previous week.

One representative claimed that auditing the Fed would result in rising interest rates, a stock market crash, a decline in the dollar’s value, and a complete loss of confidence in the US economy. Those who understand economics know that all of this is actually what awaits America unless we change our monetary policy. Passing the audit bill is the vital first step in that process, since an audit can provide Congress a road map to changing the fiat currency system.

Another charge leveled by the Fed’s defenders is that subjecting the Fed to an audit would make the Fed subject to political pressure. There are two problems with this argument. First, nothing in the audit bill gives Congress or the president any new authority to interfere in the Federal Reserve’s operations. Second, and most importantly, the Federal Reserve has a long history of giving in to presidential pressure for an "accommodative" monetary policy.

The most notorious example of Fed chairmen tailoring monetary policy to fit the demands of a president is Nixon-era Federal Reserve Chair Arthur Burns. Burns and Nixon may be an extreme example — after all no other president was caught on tape joking with the Fed chair about Fed independence, but every president has tried to influence the Fed with varying degrees of success. For instance, Lyndon Johnson summoned the Fed chair to the White House to berate him for not tailoring monetary policy to support Johnson’s guns and butter policies.

Federal Reserve chairmen have also used their power to shape presidential economic policy. According to Maestro, Bob Woodward"s biography of Alan Greenspan, Bill Clinton once told Al Gore that Greenspan was a “man we can deal with,” while Treasury Secretary Lloyd Bentsen claimed the Clinton administration and Greenspan’s Fed had a “gentleman’s agreement” regarding the Fed’s support for the administration’s economic policies.

The Federal Reserve has also worked to influence the legislative branch. In the 1970s, the Fed organized a campaign by major banks and financial institutions to defeat a prior audit bill. The banks and other institutions who worked to keep the Fed’s operations a secret are not only under the Fed’s regulatory jurisdiction, but are some of the major beneficiaries of the current monetary system.

There can be no doubt that, as the audit bill advances through the legislative process, the Fed and its allies will ramp up both public and behind-the-scenes efforts to kill the bill. Can anyone dismiss the possibility that Janet Yellen will attempt to "persuade" Donald Trump to drop his support for Audit the Fed in exchange for an “accommodative” monetary policy that supports the administration’s proposed spending on overseas militarism and domestic infrastructure?

While auditing the Fed is supported by the vast majority of Americans, it is opposed by powerful members of the financial elite and the deep state. Therefore, those of us seeking to change our national monetary policy must redouble our efforts to force Congress to put America on a path to liberty, peace, and prosperity by auditing, then ending, the Fed.

Yellen's Self-Serving Assessment: Fed Is "Doing Pretty Well"

Authored by Mike Shedlock via MishTalk.com,

Now that the bubbles have been blown (but still remain invisible to the Fed), Fed Chair Janet Yellen Yellen conveniently pats herself and the Fed on the back for a job piss-poorly done.

Her self-serving assessment is the Fed is “doing pretty well”. And her new message of the day is Era of Stimulative Monetary Policy Is Ending.
 

Federal Reserve Chairwoman Janet Yellen indicated Monday that the era of extremely stimulative monetary policy was coming to an end.

In a public discussion at the University of Michigan, Ms. Yellen said the Fed was moving away from its efforts to revive a recession-scarred economy and focusing instead on maintaining the gains of the past few years. That will change the central bank’s policy-making stance, she said, noting that Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate.

“Where before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now [we’re] allowing the economy to kind of coast and remain on an even keel,” she said. “To give it some gas, but not so much that we’re pressing down hard on the accelerator.”

Ms. Yellen said the Fed is “doing pretty well” in meeting its congressionally mandated goals of low and stable inflation and a full-strength labor market.

New Fed Message

This new Fed message will last until either the GDP or the stock market tanks. We will find out more on April 28 when the BEA posts first-quarter GDP.

Meanwhile, the Hard-Boiled vs Soft-Boiled Economic Egg Debate continues.

Bank Stocks, Dollar, & Yields Surge After Yellen Warns "Waiting Too Long To Hike Is Unwise" - Speech Highlights And Live Feed

Live Feed

* * *

March rate-hike expectations have risen to their historical highs... (around 36%)

Longer-term Treasury yields took another leg higher as Yellen talked about the Fed"s balance sheet.

Bank stocks are leading post-Yellen with bonds and bullion lower... The broad stock indices are unchanged...

Utes, Tech, and Energy are weighing on indices, only banks are higher...

Treasury yields are now higher across the entire curve year-to-date...

Key Q&A Responses:

• YELLEN: WOULD ANTICIPATE BALANCE SHEET EVENTUALLY MUCH SMALLER


• YELLEN: FED DOESN"T WANT TO USE BAL SHEET AS ACTIVE POLICY TOOL


• YELLEN: FOMC TO DISCUSS BALANCE SHEET STRATEGY IN COMING MONTHS


• YELLEN: FOMC"S LONGER RUN GOAL IS TO SHRINK BALANCE SHEET - BBG

Update:  Why did the dollar and Treasuries react as if stung moments after Yellen"s prepared remarks were released?

Because according to a cursory scan of her speech, she was more hawkish than most expected, arguably making a March rate hike "live" after warning that "as I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession."

Further hawkishness emerged from her claim that "Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate."

Yet to offset that hawkshness, Yellen cautioned that the US economy and fiscal policy face an uncertain path under the administration of Donald Trump, as she played down any expectations of a March rate rise and declared “monetary policy is not on a preset course”. In prepared remarks for her Valentine’s Day testimony Ms Yellen also struck a note of caution about the new administration and expectations that its plans for tax cuts, infrastructure spending would lead to looser fiscal policy and more rapid growth.

Indeed, looking at the Fed Funds market, March, the increase so far has been some what tepid, with odds increasing from 30% before, to 36% after Yellen"s prepared remarks.

“Considerable uncertainty attends the economic outlook,” she said, pointing to “possible changes in US fiscal and other policies” as one of the main sources of that uncertainty alongside questions about productivity growth and international developments.

She added that any future moves, Ms Yellen said, would depend on continuing progress in both US employment and inflation, which at 1.6 per cent remains below the Fed’s 2 per cent target rate.

“The economic outlook is uncertain, and monetary policy is not on a preset course,” she told members of the Senate Banking Committee, adding that “changes in fiscal policy or other economic policies could potentially affect the economic outlook,” she said, adding that “it is too early to know what policy changes will be put in place or how their economic effects will unfold”.

* * *

Here are the speech higlights, courtesy of BBG

• Yellen says incoming data indicates labor market conditions continue to strengthen and inflation is moving to 2%.


• “At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” she says in prepared testimony for a Senate Banking Committee hearing


• “Waiting too long to remove accommodation would be unwise,” Yellen reiterates


• Discussing the balance sheet, she says committee has continued policy of reinvesting


• “This policy, by keeping the Committee’s holdings of longer-term securities at sizeable levels, has helped maintain accommodative financial conditions”


• Says monetary conditions are accommodative, which supports “some further strengthening” of labor market conditions and a return to 2% inflation


• Says FOMC expects economy to continue expanding at “moderate pace” as job market strengthens “somewhat further” and inflation gradually increases to 2%


• “The economic outlook is uncertain, and monetary policy is not on a preset course,” she says, adding uncertainties include possible changes in fiscal and other policies, the path of productivity growth and intl developments


• It’s too early to know what policy changes will occur or how their effects will unfold, she says


• Yellen highlights importance of improving the pace of longer-run economic growth and raising living standards with policies designed to improve productivity


• Says she hopes fiscal changes will be consistent with putting fiscal accounts on sustainable path

The dollar reaction:

And yields:

* * *

Earlier:

Fed Chair Yellen will be appearing before Congress deliver her semi-annual monetary policy testimony (sometimes called the "Humphrey-Hawkins" testimony) today. Her prepared remarks are expected to sound similar to her most recent speech, noting that the labor market has tightened and wage pressures are increasing modestly.

As BofA details, she will likely note that the Fed is making progress toward its mandate of full employment and price stability with core inflation approaching the target.

However, we expect Yellen to reiterate that the Fed must proceed with a gradual hiking cycle, since rates are still close to the effective lower bound and that long-term rates are structurally lower.

In the Q&A session, we expect the focus to be on the debate over rules-based policy vs. discretion, the Fed"s independence and proposed fiscal policy.

Yellen is likely to defend the Fed"s independence and reiterate that fiscal stimulus is helpful, but that it depends on the design, especially given high debt levels.

"Our base case is Yellen will largely dance around the question but will nonetheless leave the door wide open to a wide range of possibilities because she can’t close any options off until the Committee has developed a plan," said Tom Porcelli, the chief US economist at RBC Capital Markets.

For now, the market is losing faith in the "three hikes" forecast...

Before she spoke the ED curve implied the following probabilities...

And the question is whether Yellen can regain control over the Dollar having lost it apparently to Trump jawboning and China action...

Key headlines from a very hawkish Yellen speech:

• *FED SAYS ALREADY-CONCERNING CRE VALUATIONS ROSE FURTHER


• *YELLEN: FED TO ADJUST RATE PATH VIEWS AS OUTLOOK EVOLVES


• *YELLEN REPEATS WAITING TOO LONG TO TIGHTEN `WOULD BE UNWISE"


• *YELLEN: FURTHER ADJUSTMENT LIKELY NEEDED IF ECONOMY ON TRACK

Key Excerpt:

As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.    
 

Full Prepared Remarks below (link here):

Donald Trump's Most Important Fed Appointment (Spoiler Alert: It's Not The Chair)

Given the tumult of the opening weeks of the Trump Administration, the public is forgiven for not realizing that the Administration is woefully understaffed. But even in the flurry of personnel announcements from first the transition team and now the Administration, on the Federal Reserve—perhaps the most powerful of governmental agencies—we have had near radio silence. Of course, Fed Chair Janet Yellen is still at the helm and will be for another year. But two long-standing vacancies are available for the President immediately, and in them lies a key to understanding a fundamental relationship that should guide how we think about the Trump presidency and the very nature of financial and monetary system. While we have already heard from the President that wrestling magnate Linda McMahon has been nominated to lead the Small Business Administration and billionaire Wilbur Ross will lead the Department of Commerce, we have only some hints about whom might fill those important vacancies.

Why the lack of movement on the Fed? Faced with similar vacancies, then President-elect Obama moved relatively quickly. Daniel Tarullo was announced in the first group of regulatory appointments, in December 2008. Granted, that was during a financial crisis: President-elect Obama may have felt early enthusiasm for filling those vacancies that President Obama didn’t share. Obama has kept vacancies at the Fed’s Board longer than in any other time in history, including when Democrats controlled the Senate. It’s possible that President Trump will treat Fed vacancies with a similar disregard.

Possible, but I wouldn’t count on it. President Trump is likely to assert himself early in influencing the Fed, as is his right. But Fed defenders and critics should also take careful note: how he uses that authority will tell us much about whether the central bank will continue in its present form as a policy-making body steeped in traditions of expertise and independence, or whether it will become another arm for partisan and political warfare.

As he has with the rest of his economic appointments, the President sits at a cross-roads with respect to the Fed given the inherent incompatibility of economic coalition members. With admitted reductionism, I’ll call these halves Bannonist, in honor of Trump’s chief political strategist Stephen Bannon; and Priebusian, for his chief of staff Reince Priebus.

A Priebusian appointment is what one might have expected from a President Mitt Romney. Sure, a hypothetical Priebusian probably had a lot to say about the Bernanke and Yellen Fed during the last eight year, most of it negative. That Governor probably opposed the Fed’s monetary policies as too dovish and thought experiments with unconventional monetary policy too extreme. That would put the Priebusian in the mainstream of the Republican majority. But whatever those priors, a Priebusian Fed Governor is also an expert. He knows an awful lot about central banking, monetary policy, banking regulation, and the like. Perhaps he’s a political operator, perhaps not, but more likely he’s someone with undisputed credentials. If the President-elect appoints a Priebusian Governor, he sends a signal to the broader economy that while the election may mean a regime change coming at the Fed, the President is not going to dispute the central vitality of a central bank using its extraordinary powers consistent with its traditions of independence and expertise.

A Bannonist appointment is entirely different. A Bannonist is likely to be an economic nationalist who wants to drain the swamp. Maybe he’s got some ties to Wall Street—Steve Bannon himself is a former employee of Goldman Sachs, of course—but the posture is hostility toward the technocracy and its many conceits. A Bannonist is likely to be fond of Fed conspiracy theories, which are ubiquitous in popular discussions of the Fed and will have real purchase among those who view all technocratic decision-making with hostility. And a Bannonist is also likely to have no obvious expertise on these matters. I don’t mean that a Bannonist is unlikely to have a PhD in economics, although that is almost certainly true. A PhD in economics isn’t (and shouldn’t be) a prerequisite to be a superb central banker. I mean that a Bannonist won’t have experience in central banking really at all.

To be clear, there is merit to the argument that central bankers use their claims to independence and expertise as a mask for more ideological maneuvering. As I have written, how central bankers use the significant machinery of monetary policy to resolve uncertain questions necessarily reflects their ideologies and worldviews. They are political institutions embedded within the political system. This is why presidential elections matter so much to their governance, and rightly so. We can invoke Churchill in his celebration lament: democracy is a pretty terrible system for selecting these technocrats, except for everything else we’ve ever tried.

The point is that a Bannonist rejection of expertise and independence as pure applesauce is a dramatic and destabilizing overreaction. If central bankers don’t look like aeronautical engineers plotting a satellite’s orbit, neither are they the same as a Karl Rove or David Axelrod trying to do what is best for the political prospects of their sponsors. The institutional innovation of central banking is the ability to protect citizens from their own worst short-term instincts by protecting the integrity of the currency against laments that money should flow more freely and easily. That experts disagree doesn’t mean they aren’t exercising expertise.

Many Democrats will reflexively oppose a Priebusian candidate because she will be a Republican. I hope they don’t. Opposition may come after vetting—there are plenty of Priebusian candidates who, for a variety of reasons, shouldn’t be given the keys to that particular kingdom. But, as the saying goes, elections have consequences. The guide here should be Sen. Lindsey Graham’s approach to judicial nominations. Democrats to adopt the same approach for Fed appointments. It won’t be easy, of course, as the debates around the eminently qualified Supreme Court nominee Neil Gorsuch demonstrates: most Republicans haven’t followed this example when evaluating President Obama’s own highly qualified Fed appointments.

But the Fed is more important than to waste opposition on mainstream candidates with the relevant expertise to accomplish their assigned tasks, assuming they survive a reasonable vetting. A Priebusian Fed Governor probably hasn’t cheered Democratic initiatives, but he has an undisputed expertise. If the appointment that President Trump announces qualifies in that way, then the work of congressional accountability, not congressional obstruction, should begin.

If, on the other hand, the President appoints Bannonists to those open vacancies, it’s essentially a declaration of war against the idea of independent central banking, as tangled as that label can be. At that point, the hard-money types in the Republican coalition, Democrats virtually everywhere, and perhaps especially Fed insiders will be on notice: if they value the idea of expert decision-making in the central bank, then the stakes couldn’t be higher. As the dust settles on this first generation of President Trump’s cabinet appointments, we should not let these two seemingly obscure appointments go unnoticed. They will be among the most important the President will make.

A More Dovish Janet Yellen Speaks Again, Sees No Risks Of Economic Overheating

Following her Trump-weaker-dollar-destroying performance yesterday, Fed chair Janet Yellen reprises her role as Mnuchin-slayer tonight with an appearance at Stanford"s Institute for Economic Policy Research. In a speech entitlted "The Economic Outlook and Conduct of Monetary Policy" she is expected to deliver a similarly hawkish tone confirming multiple rate hikes (though no rush) and potentially erasing the dollar weakness from today...

In her latest speech, which while a recap of remarks deliver yesterday had a far more dovish tone, Yellen reiterated monetary policy has not fallen behind the curve because the economy is not overheating and stated she well understood the risk of letting the economy run too hot for too long, MNI noted.

Delivering her second speech on Fed policy in two days and on the eve of President-elect Donald Trump"s inauguration, she repeated her assessment that it is prudent to remove accommodation gradually over time as the U.S. labor market has largely recovered from the severe downturn in the wake of the financial crisis and as inflation stands much closer to the Fed"s 2% objective than its first rate hike a year earlier.

"I consider it prudent to adjust the stance of monetary policy gradually over time -- a strategy that should improve the prospects that the economy will achieve sustainable growth with the labor market operating at full employment and inflation running at about 2 percent."

On Wednesday, Yellen said the policymaking Federal Open Market Committee expects to raise interest rates a few times a year until it reaches 3% by the end of 2019. But in her Thursday evening speech, Yellen delved into some of the "considerable" uncertainties that cloud the FOMC"s call.

"it is important to emphasize the considerable uncertainty that attaches to such assessments and the need to constantly update them." adding that "In particular, the path of the neutral federal funds rate, which plays an important role in determining the appropriate policy path, is highly uncertain."

Some key factors bearing on the path of the neutral rate include productivity growth, the strength of global growth as well as potential for changes in fiscal policy -- a likely reference to Trump"s promises to cut taxes, deregulate businesses and invest in infrastructure.  

"I would mention the potential for changes in fiscal policy to affect the economic outlook and the appropriate policy path. At this point, however, the size, timing, and composition of such changes remain uncertain," she said.

"However, as this discussion highlights, the course of monetary policy over the next few years will depend on many different factors, of which fiscal policy is just one."

Global growth could play another important role on the neutral rate through both trade and financial channels, the Fed chair said.

More importantly, she said that major swings in the dollar"s exchange rate could present a headwind to inflation moving up to the Fed"s target over the next couple years as the FOMC currently expects.

The dollar had another mention, when Yellen said "although core inflation is rising gradually from a low level, this increase mainly reflects the waning of the effects of earlier movements in the dollar, not upward pressure from resource utilization."

On the other hand, Yellen said she considers it "unlikely" that overheating "could rapidly emerge" as the labor market strengthens further, causing inflation to surge.

Economic growth is unlikely to pick up markedly in the near term, and the pace of monthly job gains has slowed in the past year. At the same time, wage growth has remained subdued.

"In the coming months, I expect some further strengthening in labor market conditions as the economy continues to expand at a moderate pace -- a view that is shared by most of my colleagues on the Federal Open Market Committee," she said.  

Yellen also spent a portion of her speech Thursday discussing benchmark policy rules, saying while they offer useful guidance, they are arguable still too restrictive.

Her full speech can be found here.

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Janet Yellen Live Feed (due to begin at 2000ET)...

The Case Against Fed Reform

This week the 115^th Congress was sworn in, and there are some indications that Fed reform may be on the agenda. The combination of populist anger fueled by Ron Paul’s Presidential campaigns and the 2008 financial crisis coupled with the repeated failings of the Federal Reserve to meet their projections has created a rare window for monetary policy to be both politically advantageous, as well as so obviously needed that even politicians can see it.  

The question now is what sort of reform is on the table.

Congressional Reforms

Last Congressional session saw proposals from both the House and the Senate.  

From the House we have the FORM Act, which would require the Fed to adopt a monetary policy rule and explain to Congress whenever they deviate from that rule. The FORM Act also calls for an annual GAO audit of the Federal Reserve, doubles the number of times the Fed Chairman testifies before Congress, and makes some other tweaks to the makeup and protocol of the Federal Reserve Board. Since the FORM Act passed the House in 2015, there is a good chance we will see it resurrected in 2017.

On the Senate side, Banking Committee Chairman Richard Shelby has pushed for the Financial Regulatory Improvement Act. Not only does it lack a catchy acronym, but its reforms to the Fed are far more modest than the FORM Act. The meat of the bill focuses on changes to the Fed board. The head of the New York Fed would no longer be appointed the banks board of the directors, but would instead be nominated by the President and confirmed by the Senate – just like the Federal Reserve Chairman. It would also grant powers to the Fed’s regional presidents that currently only reside with the board of directors.

Though early drafts of the Senate bill called for the Fed to adopt rules-based monetary policy, this ended up being stripped from the final proposal due to Democratic opposition – largely because much of the Hill focus has been on the Taylor rule, which many Fed advocates fear is too restricting.

The Battle Over the Taylor Rule

Recently this debate has played out in the pages of the Wall Street Journal with Neel Kashkari and John Taylor exchanging op-eds on the virtues of rules-based policy.

Though Kashkari begins with a broad attack on monetary rules, it quickly devolves into a focused attack on the Taylor Rule which he argues “effectively turn[s] monetary policy over to a computer, rather than continue to let Fed policy makers use their best judgment to consider a wide range of data and economic trends.” Of course Kashkari ignores that the “best judgement” of Fed policy makers has been widely criticized – and not just by Austrians who oppose any sort of Fed policy at all.

Kashkari’s allusion to a computer-guided monetary policy is may be an attempt to get readers to conflate recent monetary rules proposals to the views of Milton Friedman that have not aged particularly well. In Taylor’s response, he criticized the portrayal for being dishonest while pointing to various analysis critical of the Fed behavior since the crisis.

What’s more interesting than the finer details of the debate over the relative virtues of the Taylor rule is how that specific proposal has largely been the single focus of those critical of rules-based policy. Though support for the Taylor rule has become largely split on partisan lines, there is another monetary rule that has growing support from across the ideological spectrum.

The Appeal of NGDP Targeting

Following 2008, NGDP targeting has grown from a topic of conversation largely limited to blogs such as Scott Sumner’s The Money Illusion, to something discussed openly among central banks, prominent publications, and even Presidential candidates. The proposal would require a central bank to set a nominal goal for GDP – without taking into account inflation or deflation – and allow it to use a variety of tools to reach that goal. Since the policy gives Fed critics a black and white standard to measure its performance, without putting too many restrictions on the Fed as to ruffle the feathers of Fed proponents, it has been able to build a broad coalition of support. As a result, you have progressives such as Christina Romer and Brad DeLong on the same side as the Cato Institute and the Mercatus Center.

Of course widespread appeal is not the same thing as sensible policy. As Shawn Ritenour sums up his brilliant refutation of the proposal:

NGDP targeting advocates end up fostering the monetary illusion that scarcity can be overcome and prosperity can be achieved via monetary inflation.

Unfortunately policy does not have to be sensible to become reality.

Should the House succeed in creating pressure on the Senate to act on a version of the FORM Act, it would not be surprising to see the discussion move away from the Taylor rule to NGDP targeting – with advocates selling its broad appeal as its leading virtue. The Fed Audit, which has consistently been fought by the Senate, could easily be dropped – with Republican legislators being able to point to the endorsement of the beltway’s leading libertarian think tanks as evidence of being tough on the Fed.

The Real Problem with Rules-Based Monetary Policy

Of course no matter if it is NGDP targeting, the Taylor rule, or even a rule that would have the Fed tie itself to gold – the entire debate about rules-based monetary policy ignores the obvious: rules are meant to be broken.

We’ve already seen this play out routinely at the Fed, with both sides of the isle usually accusing the Fed of not upholding one side of its current dual mandate. History is littered with examples of government financial institutions ignoring and modifying rules whenever they directly conflict with the judgment of current leaders. As recently as 2015, the IMF arbitrarily changed a long-standing policy on loan requirements so it could help Ukraine. The US government changed long-standing monetary policy rules when faced with a crisis, such as when it cut the dollar’s connection with gold for both domestic and international payments.

Be it Constitutional rights, contractual obligations, or its own self-imposed rules, when push comes to shove the government officials have proven they will side with their own judgment – no matter what the rule is.

So while there are certainly arguments to be made in favor of a rules-based Fed over the pure discretion of the current PhD standard, such reform should not be viewed as a solution to the real issue, which is a central bank having a monopoly on money at all. Instead of a Fed reform, we need Fed competition: eliminate legal tender laws, remove the burdensome taxes placed on gold, Bitcoin and other potential currencies, and give Americans a true alternative to Federal Reserve notes for those who want it.

Anything short of that continues to let the Fed’s monopoly on money continue, and is therefore no real solution at all. 

Will Trump Fire Janet Yellen? Here Is Wall Street's Response

One of the burning questions troubling Wall Street this morning, now that stocks have managed to successfully absorb last night"s limit down selling and most recently were trading at highs of the day, is whether president elect Donald Trump plans on reshuffling the Fed, eliminating its so-called "independent" and perhaps going so far as firing or "requesting" Janet Yellen"s resignation.

According to T. Rowe Price"s chief economist, Alan Levenson, Trump"s proposals "threaten to undermine global faith in the independence of the Federal Reserve and the geopolitical standing of the United States." Others, such as FBR"s Edward Mills went further: "The future of Janet Yellen"s chairmanship and the accommodative nature of Fed monetary policy are in doubt." Deutsche Bank strategist George Saravelos had a similar view: "the market will be looking for confirmation that Chair Yellen will not resign. Trump has been particularly critical of her term so policy continuity will be particularly important."

So to answer the question whether or not Yellen"s role is in jeopardy, we went to the two most authoritative sources available: the two biggest and most influential US banks: JPMorgan and Goldman Sachs. In a note written on November 7, before Trump"s election, JPM"s chief economist Michael Feroli asked "If Trump wins would Yellen leave?" and answered: "In a word: no."

He added that while Trump has grown increasingly critical of Fed Chair Yellen, "her term as Chair does not expire until early February 2018, and her term as Governor extends to January 2024. The Federal Reserve Act only permits the President to remove a Governor “for cause” and historically this authority has never been abused by the President. For example, even Nixon did not try to remove Chairman Martin in the 1968-1970 period, even though he believed Martin’s monetary policy may have cost him the 1960 Presidential election."

He then lays out another theory that Yellen would resign if Trump were elected. JPM says that it sees "no historical precedent for this. In contrast, there are plenty of precedents for a Chair appointed by a President from one party to continue serving under a President from the opposite party. In fact, since the Treasury-Fed Accord of 1951, every Fed Chair has served under Presidents from both parties, except for Yellen (so far) and the luckless G. William Miller. Moreover, we don’t see a rationale for the apparently Democratic Yellen to give President Trump even more influence over the course of monetary and regulatory policy by immediately stepping down. That said, we doubt she would stay on as Governor even after her term as Chair expires. While this is legally possible, every Chair since Eccles left the Board after their term as Chair ended."

And then there is Jan Hatzius, Goldman"s chief economist, who also in a note from the day prior to the election asked "will Janet Yellen continue to serve as Fed Chair after the election?" Here is his response:

Yes, at least until her term ends in February 2018. Chair Yellen was appointed by President Obama to a four-year term ending February 3, 2018 (and simultaneously to a term as member of the Board of Governors ending in 2024). In contrast to some reports, past Fed chairmen have not customarily offered their resignations to newly elected presidents. For example, according to his memoirs, former Chairman Bernanke deliberated whether he would accept a reappointment, but never offered to resign. Similarly, Alan Greenspan was apparently unsure about his prospects for reappointment under President Clinton because, as he put it, Clinton “was a Democrat and no doubt wanted one of his own.” But he does not seem to have considered resigning.

In earlier years, Fed chairmen sometimes resigned their post, or at least offered to do so. Paul Volcker considered resigning after famously losing a vote to change the discount rate in 1986, but ultimately decided against it. Upon reappointment by President Reagan, Volcker indicated that he planned to serve only two years of his four year term, but in fact offered his resignation just two months before his term expired. William McChesney Martin—Board Chairman from 1951-1970—offered to resign when President Eisenhower was elected, because he was a Democrat and Eisenhower was a Republican; the new president asked Martin to stay on as chairman. Martin made no offer to resign after the next four presidential elections, and in fact made a point of not resigning in 1960 after then-Senator Kennedy criticized the conduct of monetary policy while on the campaign trail.

Thus, while there is some precedent for the Fed chairman to resign upon a new president taking office, it looks more the exception than the rule, and has been uncommon in modern Fed history. In any case, we think Chair Yellen is very likely to serve out her full term, regardless of who wins the election.

In other words, at least when it comes to Wall Street, i.e., those who indirectly instruct the Fed what to do through their governorships, Yellen is safe. Then again, it was the same Wall Street experts of whom not a single one correctly predicted a Trump victory. Which is why one had to go off Wall Street forecasts, we would certainly be concerned about the tenure of Janet Yellen, and certainly pay close attention to what Trump says on the topic during his next media appearance.