Fed chair, Janet Yellen was at Capitol Hill this week,
testifying before Congress. Among the many questions posed to Janet Yellen by
lawmakers in Congress were her thoughts about regulatory reforms, tax cuts and
the possible repeal of Dodd-Frank. Republican Senator from Tennessee, Bob
Corker questioned Yellen about the economic effects of an overhaul of
Obamacare, tax changes and regulatory measures. Of course, the whole point of
making such dramatic changes is to accelerate growth in the United States by removing
the vestiges of the past that constrained economic growth. Excess regulations
are economically burdensome on companies, although they are designed to
safeguard the public. Dodd-Frank was put into place to counter the recklessness
of the big banks on Wall Street that precipitated the Global Financial Crisis
in 2008.
However, President Trump is having none of it and wants to
completely replace what he considers to be an antiquated and economically
harmful series of regulations. Dodd-Frank
comprises 2,300+ pages of complex legislation. It emphasizes government control
over the finance sector, and puts in place Stress
Tests to ensure that banks are liquid enough to sustain another financial
crisis. It is targeted at banks with holdings of $50 billion, and at times
requires a cushion of 3% in cash holdings of all assets under the banks’
control.
Banks that fail the Stress
Test are slapped with punitive measures, and operate under an umbrella of blacklisted companies. For Yellen, many
of these questions are open-ended. She was measured in her response to Congress
and stated that the Fed would have to carefully weigh any shifts in policy. She
is also a firm adherent of health insurance, and cautioned against repealing
and replacing Obamacare. Fed chair Yellen is also uncertain whether the
relationship between NFP data and inflation holds true with the proverbial
Phillips curve. Market participants who adhere to traditional trading practices
are at a loss. When trading economic trends, decreasing unemployment is typically coupled with rising
inflation. This is not happening in the US.
What are Yellen’s thoughts about President Donald Trump’s Fiscal
Policies?
Janet Yellen was reluctant to divulge too much information
about how Fed policy would be affected by President Trump. The private sector
has no qualms about Trump’s policies, because they believe that many of his economic
plans are pro-growth. For the Fed, the macroeconomic perspective is more
complex. Yellen stated that there is no clarity vis-à-vis Trump’s policies as
yet. Once a plan has been put into place, the Fed will likely work alongside
the government to ensure that full employment, price stability and inflation
targets are met.
With regards to interest rates, we can expect the Fed to
hike rates in March when the FOMC meets again. Currently, the federal funds
rate is standing at 0.50% – 0.75%, but the possibility of rate hikes coming
sooner, rather than later is growing. This is now being priced into equities
markets which are cooling. The USD is also strengthening on the back of the Yellen’scomments. Recall that the greenback prospers with rate hikes because less
USD will be in circulation and more will be demanded. Interest rate hikes are
bad for stocks because the companies that borrow heavily to finance their
operations will now be paying more to banks and financial institutions in
interest repayments. So, stock prices will retreat accordingly.
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