Will Fischer Cramp Yellens Style at the Fed?

Jeffrey Shafer, who helped recruit Fischer to Citigroup (C) last decade, said he doesn’t believe appointing Fischer “undercuts the choice” of Yellen at all.

“I’m sure they would not have done this without her blessing. I think it says something about Janet that she is comfortable with someone on her team with his eminence. I think they will get along and make a very good team,” said Shafer, who previously worked at the Fed and the Treasury Department.

From a philosophical perspective, Fischer and Yellen have far more to agree on than not.

They have both been supporters of the Fed’s controversial $85 billion bond buying exercise and super low interest rates. In fact, Fischer oversaw a QE program of his own at the Bank of Israel.

“We see little daylight between Fischer and the current core FOMC leadership with respect to their basic paradigm for thinking about the economy,” Goldman Sachs (GS) economists Jon Hatzius and Kris Dawsey wrote in a note to clients this week.

While Fischer is skeptical about calendar-based forward guidance, Yellen has been one of its biggest proponents. As the Fed begins to dial back QE, it is expected to lean heavily on forward guidance, which indicates the expected path of monetary policy in the future.

Still, this isn’t seen as a major stumbling block for the likely new Fed leadership.

“We have little doubt that Yellen and Fischer would see eye to eye on the need to prevent a large tightening of financial conditions anytime soon, so the slightly greater uncertainty that might result from his nomination is mainly about tactics, not strategy,” Hatzius and Dawsey wrote.

 

Wilbur Ross: Janet Yellen will be slow to make changes

I PERSONALLY DO NOT THINK THAT JANET YELLEN IS GOING TO DO ANYTHING VERY PRECIPITOUS.

I THINK SHE WILL BE SLOW TO MAKE CHANGES AND WHEN SHE DOES I WOULD WAGER THAT THEY WOULD BE VERY, VERY GRADUAL.

MAYBE SOMETHING AS GRADUAL AS CUTTING IT BACK FROM THE CURRENT 85 BILLION A MONTH BY PERHAPS FIVE BILLION A MONTH OVER A 17-MONTH PERIOD WHICH SHOULD BE A VERY, VERY GRADUAL EASING OF THING.

 

The enigma of Janet Yellen as Fed chair

Yellen’s confirmation will warm the chilly heart of Wall Street, which fears “tapering” — slowing the $85 billion per month pace of buying bonds, a.k.a. printing money — even more than it seemed to fear the possibility of a default. She probably will continue, perhaps even longer than the departing Ben Bernanke would, the “quantitative easing” that is “trickle-down economics” as practiced by progressives:

Very low interest rates drive investors into equities in search of higher yields. This supposedly produces a “wealth effect” whereby the 10?percent of Americans who own about 80?percent of stocks will feel flush enough to spend and invest, causing prosperity to trickle down to the other 90?percent. The fact that the recovery, now in its fifth year, is still limping in spite of quantitative easing is, of course, considered proof of the need for more such medicine.

Easing serves two Obama goals. It enables the growth of government by deferring its costs with cheap borrowing. And it redistributes wealth: By punishing savers, it effectively transfers wealth from them to borrowers.

Although Yellen’s convictions are honestly convenient for the current administration, members of the Senate Banking Committee should question her about what she considers appropriate — and inappropriate — relations between a Fed chair and government’s political officers. The senators should read “Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969-1974,” and “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,” by Burton A. Abrams in the Journal of Economic Perspectives (Fall 2006).

Various of Burns’s diary entries begin “President called and asked me to come over,” “The meeting at Camp David,” “President telephoned.” Although the Fed chairman insisted “there was never the slightest conflict between my doing what was right for the economy and my doing what served the political interests of RN,” RN took no chances. His speechwriter William Safire, in his memoir “Before the Fall,” recounts that Nixon planted negative media stories about Burns — e.g., saying Burns was requesting a large pay increase, whereas he actually suggested a pay cut — and threatened to weaken him by expanding the Fed’s Board of Governors.

There is no reason to doubt Yellen’s intellectual integrity; there is reason to wonder where she thinks the autonomous Fed now fits in the government. The Fed seems to be evolving into a central economic planner with a roving commission to right social wrongs such as unemployment. About this Yellen talks with a humane passion that speaks well of her but is more suited to a political official.

There is considerable congruence between Yellen’s economic theories and the policy preferences of the Democratic liberals who secured her nomination. They probably favor quantitative easing forever and consider themselves her constituents. Is she prepared to disappoint them.

Senate Banking approves Janet Yellen nomination - Politico

“Dr. Yellen is a model candidate for chair of the Fed,” Senate Banking Committee Chairman Tim Johnson (D-S.D.) said. “She has devoted a large portion of her professional and academic career to studying the labor market, unemployment, monetary policy and the economy.”

Republicans have used Yellen’s nomination to bash the Fed’s easy money policies, in particular, its program to buy $85 billion a month in Treasury and mortgage bonds to keep long-term interest rates low.

”The long-term costs of these policies are unclear and frankly worrisome,” said Sen. Mike Crapo of Idaho, the panel’s top Republican. “The immediate benefits are questionable and markets have become far too reliant on monetary stimulus.”

Yellen had been expected to win enough Republican support to get the needed 60 votes, but that issue become moot on Thursday when the Senate voted to change chamber rules so that now only a simple majority will be needed to confirm presidential nominees.

Yellen “understands that the Fed should be playing an active role in supervising and regulating the largest financial institutions, and that the Fed’s supervisory responsibilities are just as important as its monetary policy responsibilities,” said Sen. Elizabeth Warren (D-Mass.).

 

Janet Yellen: No Equity Bubble, No Real Estate Bubble, And No QE Taper Yet

In her first public appearance as nominee to succeed Fed Chairman Ben Bernanke, Janet Yellen faced the Senate Banking Committee, reiterating her intention to keep the monetary spigots wide open while rejecting the notion that we are seeing asset bubbles as a consequence of quantitative easing.  Yellen noted there is “no set time” for tapering, implicitly admitted the Fed lost control of the market during the summer so-called taper tantrum, and agreed that investors buy gold to protect from “catastrophe.”

“It could be costly to fail to provide accommodation [to the market],” Yellen told Senators on Thursday, making it clear that she is a staunch supporter of quantitative easing and ultra-loose monetary policy. “This program can’t continue indefinitely,” she also added, noting the longer we have QE the greater the risk for financial stability, “and I look forward to leading when the time is appropriate for normalizing.”

Yellen, who has served at the Federal Reserve “at different times and in different roles over the past 36 years,” confirmed she shares Ben Bernanke’s convictions.  A dove within the FOMC, Thursday hearing makes it clear that under Yellen, the Fed will continue in the same path activism and increased communication.

Her style, in terms of public speaking, differs dramatically from Bernanke, who at times was confrontational and assertive.  Yellen is soft spoken and chooses to deconstruct every argument, answering every point from a technical perspective.  After giving some creed to other opinions, though, she will stand her ground, as when she acknowledged QE hadn’t been perfect, yet it has made “a meaningful contribution” to economic growth, particularly creating a wealth effect and boosting the housing and the auto market.

Several Senators chose to push Yellen on the issue of asset bubbles, which the Vice Chairwoman said are notoriously hard to anticipate.  Yellen rejected the notion that stocks are in bubble territory, despite the major indexes hitting record highs in the context of a stagnant economy and high unemployment, pointing to the equity risk premium and other valuation metrics.  “[There is] no federal rule to support the stock market,” she replied to Senator Dean Heller (R-Nev.).

It was Heller who also pushed her on the issue of gold, asking Yellen if she followed gold prices.  “To some extent,” the nominee responded, adding that there are no good models to predict price swings in the yellow metal, but that it has a following as a hedge to tail-risk and catastrophe.  “That’s a better answer than I got from Chairman Bernanke,” Heller said.

Yellen was also asked about the housing market, which Fed Chairman Bernanke has consistently raised as one of his tenure’s successes in the aftermath of the crisis.  With stocks in homebuilders like KB Home and Toll Brothers Toll Brothers going through the roof, and major financial names like Blackstone buying up single family homes, Yellen said that is nothing more than “a rational response by the market.”  She spoke of markets like Las Vegas, which had been hit the hardest by the crisis and had rebounded strongly as of late.

On the issue of QE being an elitist policy, favoring those holding financial assets and failing to trickle down to Main Street, Yellen was diplomatic in her attempts to answer.  Admitting asset purchases harm savers, she tried to emphasize the wealth effect and the fall in unemployment, but never acknowledged the marginal decline in the efficiency of the policy.

The expected successor to Chairman Bernanke also implicitly admitted the Fed lost control of the market during the summer, when the mere indication of tapering sparked a surge in interest rates that pushed mortgages up 100 basis points and dramatically tightened financial conditions. Saying “I don’t think the Fed should be a prisoner of the market,” she accepted that the behavior of financial markets forced them to ultimately recognize the impact of their communication, even mentioning them in their policy statement.

Yellen is expected to be confirmed as Fed Chief, which means investors can expect more of the same policy decisions they have seen over the past several years.  In her first Senate appearance as a nominee, Yellen gave the market a taste of her style: soft spoken, thorough, and dovish.

As Fed chief, Janet Yellen set to become one of world's most powerful women - Vallejo Times-Herald

As soon as this week, a quiet Bay Area economist could become one of the most powerful women in the world.

"She's overqualified, which is hard to say for a position like that," said economist Carl Shapiro, a longtime colleague of Yellen's at Cal. Shapiro, like others, praises her knowledge, experience, savvy and temperament. A Cal spokeswoman said Yellen, 67, was not granting interviews. As far back as her first term on the banking system's board of governors, she has kept a low profile.

"Markets hang on one's every word, sometimes reading too much into what one says," she told a Fed magazine in 1995. That spotlight is about to grow more intense. Yellen grew up in a working-class neighborhood in Brooklyn, N.Y. Her parents -- a schoolteacher and a physician -- spoke often of their struggles during the Great Depression, which later led to Yellen's belief that government must sometimes intervene to keep the economy humming.

The Federal Reserve historically does that by raising or lowering short-term interest rates. But with those rates at or near record lows, the Fed in recent years has been buying billions of dollars worth of U.S. Treasury securities to drive down long-term rates. The idea is to encourage big businesses to hire by assuring them it will remain inexpensive to borrow money.

Experts agree that one of Yellen's key tasks will be deciding when and how quickly to taper off the bond buying, which critics say has artificially boosted the financial markets. Though the global credit crash of 2008 is in the rearview mirror, the economy remains fragile. And that decision could be only the beginning of her impact on monetary policy, since future presidents, if they choose, will be able to extend her four-year term as Fed chair until 2024.

Yellen is married to fellow Cal professor emeritus George Akerlof, who won the Nobel Prize in economics in 2001. They have a net worth of $4 million to $13 million, according to Yellen's 2012 financial disclosure filing. As Fed chairwoman, she would be paid $199,700 a year -- same as a Cabinet secretary.

People who've worked with Yellen, though, note her down-to-earth touch. An expert in fiscal policy and international trade, she has also twice won the top teaching award at Cal's Haas School of Business. "In government institutions and in teaching, you need to inspire confidence," Yellen told the school's alumni magazine last year. "You have to very clearly explain what you are doing and why."

Wilcox recalled the "hundreds" of lunches he and Yellen have shared along Berkeley's Telegraph Avenue over the years. "It was often a very lively exchange ... probing to see how far I could push an argument, then watching it crash and burn as she shot holes in it."

He and other friends also call Yellen a gourmet cook, though she's been known to frequent the Fed's employee cafeteria in order to "learn what people are thinking about," as she said in the 1995 interview. Austan Goolsbee, former chairman of Obama's Council of Economic Advisers, said Yellen's personableness and knack for communication are "a perfect fit for what they need at the Fed right now." He introduced then-candidate Obama to Yellen when she chaired President Bill Clinton's economic council.

Goolsbee said that despite Washington's partisan atmosphere, "She's respected by people of every side." Indeed, Yellen largely sailed through last month's confirmation hearing in front of the Senate Banking Committee.

Sen. Dianne Feinstein, D-Calif., told this newspaper via email that Yellen "has a strong grasp of economic and monetary policy, shaped by years of study and practical application." Feinstein, who has seen the number of women in the Senate swell from four when she was first elected in 1992 to the current 20, added: "I think a woman as head of the Federal Reserve -- a talented and extraordinarily qualified woman -- is a positive development."

Yellen herself, in the 1995 magazine interview, said that while women "have made an awful lot of progress," it would probably take years until their numbers equal those of men in high-level jobs. Of her own career, she said: "I don't feel that I've faced discrimination. I've had every chance to succeed and more, and I think that's what all women should have."

Enter Janet Yellen, Intent On Trashing Whats Left Of The Dollar - Forbes

The Federal Reserve turns 100 years old next month and looks set to celebrate its anniversary by delivering much more of the same.  The looming confirmation of the “Mother of All Doves” Janet Yellen as the next Fed chief gives new meaning to the sentiment “Many happy returns,” as she sets the table for the endless banquet of Quantitative Easing to continue unabated.

0.2% of America’s biggest banks “now control more than 70% of the US bank assets.” 

Are you worried yet? Hedgeye CEO Keith McCullough thinks you should be, and with Yellen testifying explicitly that “it ain’t over till it’s over – and I say it ain’t over,” McCullough believes the next crisis will be perpetuated by central planners. Recently on HedgeyeTV, Keith explained “Why the Fed is Failing.”  The Fed’s “dual mandate” comprises price stability, and maximum employment.  Hedgeye’s analysis of 50 years of bond market data shows price volatility in the bond market is at its widest point ever.  Bond yields have shown corresponding volatility.  Between the moment the market expected the Taper, and the realization that there was to be no Taper, bond yields experienced a swing of over 50%.  This is the Fed’s version of “price stability” – in the “riskless asset,” no less.

The Fed Is Biting Off More Than It Can Chew

With the full Senate likely voting to confirm her nomination later this month, Janet Yellen is now poised to take over as chair of the Federal Reserve when current chairman Ben Bernanke's term expires on Jan. 31.

Unlike most regulators, the Fed chair shows up often enough on television screens and in newspapers to become familiar to Americans far removed from Washington, D.C. From the imposingly tall Paul Volcker to the large-spectacled Alan Greenspan to the current professorially bearded Ben Bernanke, Fed chairmen enjoy their 15 minutes of fame.

And yet, as significant a role as this person plays in the lives of everyday Americans, the duties of the central-banking wizard are largely shrouded in ambiguity. Given the rapid growth in the Fed's portfolio, the likelihood that the central bank is taking on more than it can handle and the possibility that it will be a source of — not a solution for — financial instability, it's time to look behind the curtain.

Some confusion stems from the fact that the job of the Fed chair has changed over the years, with missions ranging from providing services to banks, to regulating, to setting monetary policy. The latter, whereby the Fed attempts to keep prices stable and unemployment low, gets the most attention. That dual mission, which many believe to be hopelessly broad, sounds pretty impressive in theory, but has not worked well in practice.

To improve performance, the Fed has been testing some new tools, e.g., buying large quantities of mortgage-backed securities. It isn't clear whether this benefits the economy, but it leaves the incoming chair with a big challenge — figuring out what to do with all the mortgage bonds the central bank now has on its books and how to stop buying new ones without harming markets.

During the financial crisis, the Fed chair's role as crisis manager also cast him into the spotlight. Again, this job is actually not as glamorous as it sounds. It consisted of cooking up programs to use taxpayer money to rescue ailing firms or back up different pieces of the financial markets.

After the crisis abated, Bernanke donned a lobbying hat. He convinced Congress to expand the Fed's already substantial role as regulator to encompass more pieces of the financial system. The new Fed chair likely will keep lobbying for more power, since some pieces of the financial system, such as money market mutual funds, are still outside the Fed's regulatory grasp. But as this Mercatus Center chart shows, the Fed may have already bitten off more than it can chew in the regulatory oversight landscape.

The often-forgotten regulatory piece of the Fed chair's job was front and center at Yellen's Senate confirmation hearing last Thursday. The Fed oversees a range of entities, including certain banks, the bank holding companies in which most banks reside, savings-and-loan holding companies, companies that serve as the utility-like pipelines of the financial system and many large nonbank companies. The latter is an expanding group of firms identified by a council of regulators under the Dodd–Frank Wall Street Reform and Consumer Protection Act as likely causes of financial turmoil. This council has handed some insurance companies over to the Fed and may soon put large investment advisers that manage mutual funds under the Fed's control. These entities already have other regulators, but the Fed — not known for its humility — thinks it can do a better job.

The Fed also has a broader regulatory mandate to maintain financial stability and tamp down risk in the markets. To be candid, it doesn't really know how to achieve these objectives, but it experiments with different approaches. It is particularly enamored of a method that it learned from its friends in Europe, whereby the Fed can override private companies' sound decisions if they run afoul of the Fed's grand design for the whole financial system.

Undergirding the laws that put these responsibilities on the Fed's to-do list is a great deal of wishful thinking. The Fed cannot control the economy, the financial system or even the banks it regulates nearly as precisely as its defenders claim — and increasing its regulatory responsibilities over entities with which it is unfamiliar will further distract the central bank from its monetary policy mission. Because the Fed's missteps can have dramatic consequences for the economic well-being of average Americans, Congress should rethink the scope of the Fed's mission. For her part, Janet Yellen, if confirmed, ought to check the wishful thinking at the door and approach her new tasks with a deep appreciation for the limits of the institution she leads.

Beware Forecasters Who Are Certain They Are Right - The Weekly Standard (blog)

Our economy is increasingly policy-driven, at least in the near- and medium-terms. What Congress and the president do or don’t do, what incoming Federal Reserve Board chairman Janet Yellen does or doesn’t do, will be important determinants of our growth, inflation, and job creation rates. So here is an attempt to see through the mist of obfuscation that is a feature of political and policy-making discourse, and spy the contours of future policy. 

Start with the fact that the monetary policy gurus at the Federal Reserve Board have made it no secret that they would very much like to dismount the tiger that is QE3 -- asset purchases and money printing -- without turning slow growth into no growth or a recession. The only question is when -- sooner if some monetary policy committee members have their way, later if incoming chairman Janet Yellen prevails. Add a second fact: the belief by a majority of Fed policy makers that monetary policy works: (1) printing money keeps interest rates at or near zero, (2) zero interest rates in turn force investors to hunt for yield, which in turn (3) drives up asset prices (houses and shares), (4) creating a “wealth effect” that encourages spending by those fortunate enough to own homes and shares, (5) thereby promoting economic growth or at minimum preventing a recession.

Not everyone agrees that this five-step recovery program will produce sustainable, sober growth. After all, despite the fact that the Fed has been buying up assets and printing money at the impressive pace of $85 billion per month, the annual growth rate remains below 2 percent, and job creation, which averaged around 200,000 per month before the Fed began its asset-purchase program, is now averaging closer to 140,000. And if printing money could produce wealth, citizens from Argentina to Zimbabwe would be as rich as Croesus, rather than watching the value of their cash evaporate before they can get to the stores to spend it. Which is one reason that Richard Fisher, president of the Federal Reserve Bank of Dallas and due to become Yellen’s thorn-in-chief when he joins the monetary policy committee (technically, the Open Market Committee) in 2014, says there is a point at which printing money becomes an “agent of financial recklessness” … and worries because “none of us really knows where that tipping point is.” That admirable confession of uncertainty marks Fisher as a man to be listened to.      

When the monetary policy committee meets in a few weeks’ time it will face this set of facts:

·     The economy is growing steadily but slowly, with such growth as there is fuelled by housing and auto sales, two sectors especially sensitive to increases in interest rates, which means that higher rates might have a significant impact on overall growth.

·     The unemployment rate has been falling, but in good measure only because so many workers have become too discouraged to continue looking for work. And many of the jobs being created are part-time only.

·     Inflation, which many Fed critics feared would heat up as the printing presses rolled, remains below the 2 percent rate the Fed considers desirable, and there is more talk of possible deflation and a Japan-style lost decade than of an inflationary spurt. 

·     Policies that stifle growth seem to be preferred by our politicians. Fiscal policy is tightening as Republicans turn back President Obama’s demand for another round of stimulus spending on infrastructure, premiums paid by businesses and individuals for health insurance are rocketing skyward to discourage hiring as the provisions of Obamacare come into effect, and congress is preparing to allow benefits to the long-term unemployed expire.

From which one can conclude either that the Fed should run the presses even faster, or that the asset-buying, money-printing program known as QE3 should be wound down. Which brings us back to Yellen, and to the social values that always underlie economic policy-making. The incoming chairman would rather risk inflation and the distortions produced by zero interest rates than continued high unemployment. She has said that unemployment statistics “are not just statistics to me. Long-term unemployment is devastating to workers and their families. The toll is simply terrible on the mental and physical health of workers.” Laudable sentiments.

View the original article here

Janet Yellen talking points

During Janet Yellen`s Senate Banking Committee testimony to paraphrase she said that she doesn`t see a bubble in stock prices based upon some of the metrics they utilize at the Fed, and she mentioned that the rise in the 10-year Bond Yield approaching 3% caused the Fed to delay their previously telegraphed taper move in October. There are a couple of disturbing points that came out of her take on bubbles and the rationale behind not tapering a mere 10 or 15 Billion dollars given the monthly commitment of 85 Billion in Fed Purchases every month. 

Since when did the Fed outright Buying of Bonds become Normal?
Just the mere notion given the history of markets and the Fed`s participation in Markets that the Federal Reserve buying $85 Billion of Monthly Asset Purchases is somehow normal or not just an exceptionally unusual participation in financial markets is quite troubling. 

First problematic issue is that they do not think this policy is extraordinarily unusual, and second problematic issue is that such an extraordinary policy might not have some unintended consequences or side effects for financial markets. 

Are Markets Free or Social Instruments?
The Federal Reserve has no business whatsoever in affecting market prices of stocks and commodities, and it seems that the original purpose of easing monetary policy by lowering the Fed Funds Rate to near Zero is one thing, and yes this derivatively will effect Bond Prices and the Bond Markets, but they have no business artificially influencing the Bond Market through outright purchases of government Bonds.

This is far overstepping their purview and it vastly distorts market prices, which is bad enough in and of itself, markets exist for a reason to set prices given fundamentals of supply and demand that reflect economic conditions in the real world. 

But to not expect the massive influencing of the Bond Market to then have derivative effects into other markets like commodities and equities and that somehow prices could appreciate to unsustainable levels that come crashing down once the intervention is discontinued is just the height of irresponsibility and short-sightedness.

Market & Trading Experience in Short Supply at the Federal Reserve
Anybody that has actual market experience, someone who regularly through good and bad business cycles trades stocks, bonds, commodities and currencies recognizes how these instruments trade under all conditions. 

This is what the Fed lacks is any understanding of what constitutes normal price discovery in financial markets. Economic theory may be great for setting interest rate policy from a Macro level, but once the Fed started directly intervening in Markets, then they need some trading experience to spot bubbly conditions of asset prices, i.e., how the instruments normally trade versus the current market price action.

Distorted Price Discovery in Markets
Whenever traders get to the point where they know they can buy every dip for the last five years because the Fed was always going to bail them out either by restarting another QE Initiative, or the current backstop of 85 Billion of Direct Market Asset Purchases this distorts in a highly artificial manner true market price discovery.

It also leads to borrowing heavily on margin further incentivized by exceptionally low borrowing costs that adds additional fuel to the fire in elevating asset prices to unusually highs levels relative to the actual fundamentals of the market under normal price discovery conditions. 

Isn`t this the same Methodology & Psychology of the Last Bubble Cycle?

The most irresponsible portion of this behavior is that this is precisely the behavior that led to the financial crises, the housing crash and resultant mortgage, bank and financial system bailouts of Wall Street firms like AIG, Bear Sterns, Lehman Brothers and Citibank. 

Every regulator, politician, Fed Policy figure and Bank Executive all agreed that they had learned the lessons of using excessive leverage, excessive risk taking, and that the Federal Reserve especially was going to set the precedent of “Moral Hazard” in that they were going to go out of their way to avoid the monetary policies of excessive intervention that led to the overly disproportionate risk taking responsible for the Housing Bubble. 

And yet in just five short years we have forgotten all this wisdom and learning points and have thrown prudent risk management strategies regarding monetary policy out the window and summarily fail to recognize the Fed`s hand in creating a massively unsustainable bubble in financial markets once again.

10-Year Yield & 3% Threshold – Really?
If the Federal Reserve was threatened by the 10-Year Bond yield approaching 3% so much that they couldn`t taper a mere 15 Billion dollars, then what does that foretell for the future of these markets? The Fed ought to ask themselves this very question, and it ought to keep them up at night! This says more about the problem that the Fed has gotten itself into with regard to this unusual monetary policy initiative to intervene in financial markets - than at what price level constitutes bubbly conditions in stock prices. 

They cannot even approach un-intervening in markets because they have overstepped any normal fed policy boundary or any market policy for that matter that the level of artificial influence is to such a high degree that they basically are the entire market in certain pricing dynamics – unless they are prepared to be the market (whole other set of unintended consequences) then going from an interventionist market back to a free market means absolute chaos – and the classic example of an artificial bubble!

This is the 10-Year Bond Yield; the fact that a 3% yield threatens the Federal Reserve is absurd. This is not the 1-Year Yield, we are talking about a 10 year time period; shoot the Fed Funds Rate was 5.5% just 6 years ago! Get a grip Fed because you’re worried about the least worrisome dynamic of your Fed Policy`s unintended consequences – what happens when you have a Bond Market after five years of intervention that returns to market forces all the sudden and the US is facing a 12% interest payment on its debt? This is what the Federal Reserve should be worried about down the line. 

This isn`t my First Bubble Rodeo
I have been a market participant for the last fifteen years and have seen the Tech Bubble, The Enron-World Com Bubbles, The Housing and Financial Crisis Bubbles, and I can tell Janet Yellen asset prices including stock prices are in bubble territory. 

When I look at how easily the Google’s, Tesla, Netflix, Priceline’s, Twitter, Amazons of the world have reached these lofty price levels over the last five years the Fed has set the stage for massive price depreciation in stocks and people`s portfolios once the interventionist Fed policy is taken away – these are not normal market conditions Janet Yellen! 

Accordingly you may have an economic background, and have economic and financial models that lead you to believe that stocks are not in bubble territory Janet, but from a trading perspective, someone with actual experience in buying and selling financial assets over the last fifteen years – there is no true price discovery, i.e., instruments don`t trade in a two-sided pricing discovery process.

It is Risk-On all the time with no consequences yet for the inevitable unintended consequences of such behavior – the inevitable crash when conditions get unsustainable under any intervention policy.

Now or Later – That is the Question!
This is the real danger to forestall the cessation of intervention for longer, to delay the stepping away, to the point where asset prices get so elevated, that even with an $85 Billion Monthly Asset Purchases, the decline and losses from such elevated levels, means that stocks just crash right through levels in humongous freefalls.

This is the scenario where losses exacerbated by out of this world leverage, cause that 85 Billion to be nothing but a mere entry point for more shorting, as the Market Crash takes hold, and stocks freefall dropping chunks of losses along the way that has fund managers selling without Algos – just get this stuff out the door at any price – this is where we were in 2007 with 15 Billion Quarterly Write-Downs by the Banks! 

Hence you can pay now or pay later, but you’re going to pay Janet! So until you get some actual market experience, you keep to worrying about how to create jobs, and let me tell you when there are bubbles in stock prices Janet! 

Yes Janet I am smarter than you when it comes to Stock Market Bubbles, and we are currently in a stock market bubble. Consequently when do you want to Pay Janet – it is going to cost you either way, Pay now or Pay Much More Later on down the line!

Janet Yellen Is Now a Litmus Test

Steve Benen notes that the increasingly shrill and hyperbolic Heritage Foundation has decided to make opposition to Janet Yellen a "key vote." That is, they'll count it on their end-of-the-year scorecard that tells everyone just how conservative you are:

Thanks to the “nuclear option” there’s very little chance Yellen’s nomination will fail — Joe Manchin appears to be her only Democratic opponent — but it now seems likely that most Senate Republicans will oppose the most qualified Fed nominee since the institution was founded.

That's true, which means this has become sort of a litmus test for wingnuttery. There's simply no serious reason to oppose Yellen, who is outstandingly qualified to be Fed chair by virtually any measure. So opposition to Yellen is now a pretty simple proposition: you oppose her if you're some kind of hard money lunatic or if you feel like you have to pander to the hard money lunatics. That's it. Everyone else votes to support her confirmation. Should be an interesting roll call.

Janet Yellen one vote away from leading the Federal Reserve - Main Line

A Senate panel has advanced Janet Yellen’s nomination to lead the Federal Reserve, setting up a final vote in the full Senate. The timing of a Senate vote isn’t clear, but Yellen is widely expected to win confirmation.

The Senate Banking Committee approved the nomination 14-8. All the no votes came from Republicans, several of whom say they object to the Fed’s aggressive low interest-rate policies to support the economy.

Yellen was nominated by President Barack Obama in October to succeed Ben Bernanke, whose second four-year term as chairman will end Jan. 31. Some senators have said they plan to hold up Yellen’s nomination as leverage on other matters. That tactic is likely to delay but not derail Yellen’s confirmation.

Yellen would be the first woman to lead the Fed and the first Democrat to do so since Paul Volcker stepped down in 1987. She made clear at the committee’s hearing last week that she’s prepared to support the Fed’s extraordinary efforts to bolster the economy until there are clear signs of a sustained rebound and further improvement in the job market.

As a result, the Fed’s low-rate policies are expected to continue under her leadership. Yellen has been a close Bernanke ally, first as president of the San Francisco regional Fed bank, and then since 2010 as vice chair of the Fed’s board in Washington.

Yellen and Bernanke are both considered “doves” — Fed officials who stress the need to fight unemployment during periods of economic weakness. By contrast, “hawks” tend to worry more about inflation that could arise from the Fed’s policymaking.

In the view of Fed watchers, Yellen’s testimony last week solidified her dovish reputation. She maintained that the Fed’s bond buying program has successfully supported the economy by keeping long-term borrowing rates. And she minimized concerns that critics have raised about the bond purchases.

The Fed is adding to its investment portfolio with $85 billion a month in bond purchases. Its holdings are nearing $4 trillion, more than four times their level before the financial crisis struck in the fall of 2008.

Republican critics say they fear that by flooding the financial system with money, the Fed has inflated stock and real estate prices and could create asset bubbles that could pop with dangerous consequences for the economy. Continued...

A Senate panel has advanced Janet Yellen’s nomination to lead the Federal Reserve, setting up a final vote in the full Senate. The timing of a Senate vote isn’t clear, but Yellen is widely expected to win confirmation.

The Senate Banking Committee approved the nomination 14-8. All the no votes came from Republicans, several of whom say they object to the Fed’s aggressive low interest-rate policies to support the economy.

Yellen was nominated by President Barack Obama in October to succeed Ben Bernanke, whose second four-year term as chairman will end Jan. 31.

Some senators have said they plan to hold up Yellen’s nomination as leverage on other matters. That tactic is likely to delay but not derail Yellen’s confirmation.

Yellen would be the first woman to lead the Fed and the first Democrat to do so since Paul Volcker stepped down in 1987. She made clear at the committee’s hearing last week that she’s prepared to support the Fed’s extraordinary efforts to bolster the economy until there are clear signs of a sustained rebound and further improvement in the job market.

As a result, the Fed’s low-rate policies are expected to continue under her leadership. Yellen has been a close Bernanke ally, first as president of the San Francisco regional Fed bank, and then since 2010 as vice chair of the Fed’s board in Washington.

Yellen and Bernanke are both considered “doves” — Fed officials who stress the need to fight unemployment during periods of economic weakness. By contrast, “hawks” tend to worry more about inflation that could arise from the Fed’s policymaking.

In the view of Fed watchers, Yellen’s testimony last week solidified her dovish reputation. She maintained that the Fed’s bond buying program has successfully supported the economy by keeping long-term borrowing rates. And she minimized concerns that critics have raised about the bond purchases.

Republican critics say they fear that by flooding the financial system with money, the Fed has inflated stock and real estate prices and could create asset bubbles that could pop with dangerous consequences for the economy. Some say they also worry that the Fed’s eventual unwinding of its investment holdings will unsettle financial markets, sending stock prices falling and interest rates rising and threatening the economic recovery.

Sen. Mike Crapo, R-Idaho, said before Thursday’s vote that he would oppose her because of his disapproval of the Fed’s easy money policies.

Heritage Action Group opposes Yellen

The conservative group Heritage Action -- the political arm of the Heritage Foundation -- announced Monday that it will oppose Janet Yellen's nomination as Federal Reserve chairwoman and will make it a "key vote" by which it will score members' conservatism.

Heritage has said it fears the Fed has become more political as it has taken on a more active role following the recent financial crisis and subsequent legislation ramping up oversight on the banks.

Yellen is expected to be  confirmed and got the support of three GOP senators in the Senate Banking Committee last week.

She did earn the opposition of one Democrat -- Sen. Joe Manchin (D-W.Va.) -- but needs only 50 votes after Senate Democrats last week voted to adjust the threshold for presidential nominees.

Janet Yellen nomination approved by banking panel

The Senate Banking Committee on a strong bipartisan vote of 14 to 8 Thursday approved the nomination of Federal Reserve Vice Chairman Janet Yellen to become the next head of the central bank.

Ms. Yellen would be the first woman chairman of the Fed in its 100-year history. 

“Dr. Yellen has the experience and intellect that is necessary to lead our central bank,” said Sen. Heidi Heitkamp, North Dakota Democrat and one of the many Democrats on the committee who enthusiastically supported the nomination. “Today’s bipartisan vote reinforces the strong support for Dr. Yellen’s nomination and helps propel her toward a successful vote by the full Senate. 

The support of several committee Republicans came as somewhat of a surprise, since most are critical of the Fed’s easy money policies under current Chairman Ben S. Bernanke, policies Ms. Yellen has pledged to continue.

Still, her overwhelmingly strong qualifications — with many of years of experience in the top ranks of economic policy both at the Fed and the White House — persuaded some that she would be a good choice for what has been called the nation’s second most powerful office.

“I would prefer to see someone who held a more modest view regarding the limits of monetary policy on our economy,” said Sen. Bob Corker, Tennessee Republican and one GOP senator who voted for Ms. Yellen.

After talking with the nominee, Mr. Corker said he thinks Ms. Yellen understood the dangers of holding interest rates too low for too long, and will move as quickly as she can to normalize rates when the economy is in full recovery.

“In the end, I do believe she has the qualifications necessary to be the Fed chairman,” he said.

Mr. Corker was joined by committee Republicans Sens. Tom Coburn of Oklahoma and Mark Kirk of Illinois in voting for Ms. Yellen. Sen. Joe Manchin III, West Virginia Democrat, was the only Democrat on the panel who opposed her.

Janet Yellen is right for Fed

She seems to have a knack for knowing when to put the Fed's foot on the pedal and when to apply the brakes.

No one is better positioned than Yellen to know when and how to pull back and allow rates to rise to their natural levels. She did very well in the financial crisis. And she should do well in its aftermath.

via - USA Today

Janet Yellen: 5 Things to Know About the Next Most Powerful Woman in the World - People Magazine

Janet Yellen is on the verge of becoming one of the most powerful women in the world.

Yellen, President Obama's choice for the next Federal Reserve chair, appeared in front of the Senate Banking Committee Thursday in the first of her confirmation hearings to lead the U.S. central bank. Here are five must-know facts about the Brooklyn-born economist.

• She was an early warner of the dangers of the 2007 credit crunch. "[Yellen] had sounded the alarm bell early about the housing market bubble and excesses in the financial markets before the recession," Obama said in his speech introducing her as his nominee. "She calls it like she sees it."

• She's more concerned with jobs than inflation. The Federal Reserve has two main goals, which are often in conflict: prevent inflation and lower unemployment. Right now, despite Fed efforts to pump money into the economy, unemployment is high and inflation is low, a reverse of conventional wisdom. Yellen is on record saying she would accept more inflation – up to a point – if it came alongside a drop in the unemployment rate.

• She's already faced sexist media coverage. Before Yellen was an official nominee, a "subtle, sexist whispering campaign" spread rumors that she wasn't tough enough for the job. Even during her confirmation hearings, congressional newspaper Roll Call published a post slamming her for wearing the same suit twice in a six-week period.

• Her husband was a stay-at-home dad. When Yellen accepted a job leading President Clinton's Council of Economic Advisers in 1997, her husband George Akerlof took a leave of absence in order to manage their household. It doesn't appear to have impacted his career – he won the Nobel Prize in economics a few years later.

• She's a jogger. Like fellow Beltway bigwigs George W. Bush and Paul Ryan, Yellen is a distance runner. In 2004, she ran a half-marathon at age 57, finishing in just over three hours.

Janet Yellen Shames Congress For Austerity, Being Terrible - Huffington Post

"Fiscal policy has been working at cross purposes to monetary policy. Some of the near-term reductions in spending that we have seen have certainly detracted from the momentum of the economy and from demand, making it harder for the Fed to get the economy moving, making our task more difficult."

"We are worried about a fragile recovery, and a more supportive fiscal policy, or one that at least had less drag, that did no harm, would make life easier," she added later.

"This is an extremely difficult and to my mind very worrisome problem," Yellen said of inequality.

 

Janet Yellen talking points

The president nominated Janet Yellen, a friend and former colleague, to be the next chairman of the Federal Reserve. I expect she will marshal her strong intellect, meticulous preparation and ample experience to lead the central bank successfully.

In the coming weeks and months, financial-market participants will try to gauge whether the change in personnel at the Fed means a change in policy. In particular, they will seek to divine whether Ms. Yellen's views on quantitative easing will lead to still more asset purchases and a longer period of near-zero interest rates.

This line of inquiry is understandable, but the fate of monetary policy and the economy is about much more. The critical issues go to the very remit of the Fed, the efficacy of its tools, its rightful place in government, and its role in the global economy. Allow me to highlight—and then question—some of the prevailing wisdom at the basis of current Fed policy:

• Quantitative easing is nothing but the normal conduct of monetary policy at the zero-lower-bound of interest rates. Lowering short-term rates to bolster economic growth is a traditional tool of central banking. But QE is qualitatively different. The purchase of long-term assets from the U.S. Treasury to achieve negative real interest rates is extraordinary, an unprecedented change in practice since the Treasury-Fed Accord of 1951.

The Fed is directly influencing the price of long-term Treasurys—the most important asset in the world, the predicate from which virtually all investment decisions are judged. Earlier this year the notion that the Fed might modestly taper its purchases drove significant upheaval across financial markets. This episode should engender humility on all sides. It should also correct the misimpression that QE is anything other than an untested, incomplete experiment.

• The absence of higher inflation is sufficient license for the Fed to continue its present course. Low measured inflation and anchored inflationary expectations should only begin the discussion about the wisdom of Fed policy, not least because of the long and variable lags between monetary interventions and their effects on the economy. The most pronounced risk of QE is not an outbreak of hyperinflation. Rather, long periods of free money and subsidized credit are associated with significant capital misallocation and malinvestment—which do not augur well for long-term growth or financial stability.

• The Fed's exit from extraordinary monetary accommodation is about having the tools to drain excess liquidity. Market participants do not doubt the Fed's capabilities as an expert financial plumber. But the foremost attributes needed by the Fed to end its extraordinary interventions and, ultimately, to raise interest rates, are courage and conviction. The Fed has been roundly criticized for providing candy to spur markets higher. Consider the challenge when a steady diet of spinach is on offer.

• The conduct of monetary policy should take the rest of Washington's macroeconomic policies as given. In normal times, central bankers do just that. But these are not normal times.

The administration and Congress are unwilling or unable to agree on tax and spending priorities, or long-term structural reforms. They avoid making tough choices, confident the Fed's asset purchases will ride to the rescue. In short, the central bank has become the default provider of aggregate demand. But the more the Fed acts, the more it allows elected representatives to stay on the sidelines. The Fed's weak tea crowds out stronger policy measures that can only be taken by elected officials. Nobel laureate economist Tom Sargent has it right: "Monetary policy cannot be coherent unless fiscal policy is."

• Highly accommodative monetary policy through QE provides broad support to the economy. Most do not question the Fed's good intentions, but its policies have winners and losers, which should be acknowledged forthrightly.

The Fed buys mortgage-backed securities, thereby providing a direct boost to balance sheet wealth of existing homeowners to the detriment of renters and prospective future homeowners. The Fed buys long-term Treasurys to suppress yields and push investors into riskier assets, thereby boosting U.S. stocks.

The immediate beneficiaries: well-to-do households and established firms with larger balance sheets, larger risk appetites, and access to low-cost credit. The benefits to workers and retirees with significant fixed obligations are far more attenuated. The plodding improvement in the labor markets offers little solace.

• The Fed makes domestic decisions for the domestic economy. Yes, but the U.S. is the linchpin of an integrated global economy. Fed-induced liquidity spreads to the rest of the world through trade and banking channels, capital and investment flows, and financial-market arbitrage. Aggressive easing by the Fed can be contagious, inclining other central banks to ease as well to stay competitive. The privilege of having the dollar as the world's reserve currency demands a broad view of global economic and financial-market developments. Otherwise, this privilege could be squandered.

• "Forward guidance" is a new, independent tool at the vanguard of central bank policy-making. Since QE began, Fed policy makers have tried to explain that asset purchases and interest rates are different. Hence their refrain that tapering is not tightening, and that very low interest rates will continue after QE. Investors do not agree. Once the Fed begins to wind down its asset purchases, these market participants are likely to reassert their views with considerable force.

Recently, the Fed has elevated forward guidance as a means of persuading investors that it will indeed keep interest rates exceptionally low even after QE. Forward guidance is intended to explain how the central bank will react to incoming data. Fed projections for example, may show below-target inflation and a residual output gap justifying very low interest rates several years from now. But words are not equal to concrete policy action. And the Fed hasn't received many awards for prescience in recent years.

• Transparency of the central bank is an abiding virtue in the conduct of policy. Full disclosure of its balance sheet and operations is essential to the Federal Reserve's democratic legitimacy. But transparency in communications about future policy is not a virtue unto itself. The highest virtue is getting policy right. Given manifest uncertainties about the state of the economy, oversharing policy deliberations is not useful if markets are led astray, or if public commitments reduce policy makers' flexibility to call things the way they see them.

The Fed is a powerful institution, but its powers are neither unilateral nor unbounded. The president has nominated a person with a well-deserved reputation for probity and good judgment. The period ahead will demand these qualities in no small measure.

Can Janet Yellen stop QE ?

Benjamin Franklin once said, “Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones.”  For the new Fed Chair,  Janet Yellen, that should come as a disturbing reality considering that she has been handed a Federal Reserve and Global Economy that is dependent on the very bad habit of Quantitative Easing (Q.E.).

In fact, her situation reminds me of the Hans Christian Andersen story, The Emperor’s New Clothes.  As the story goes:

There once was an emperor who only cared about his clothes and about showing them off. One day a couple swindlers stopped by to say they could make the finest suit of clothes from the most beautiful materials. This cloth, they said, also had the special capability in that it would be invisible to anyone who was either stupid or unfit for his position.

Being a bit nervous about whether he himself would be able to see the cloth, the emperor first sent his trusted advisors to see it. Of course, neither could see the actual cloth but wouldn’t admit it so, instead, they praised it. The townspeople had also heard of this magnificent magical cloth and, naturally, were curious to learn which of their neighbors were unwise and unfit.

Finally, the emperor dressed in his new clothes for a procession through town, unwilling to admit that he was too stubborn to see what he, in fact, was not wearing.  He was simply afraid that others would think him too stupid and, thus, unfit to rule.

Of course, all the townspeople wildly praised the emperor’s splendid new clothes, afraid to admit that they could not see them.  At last, a small child spoke up, “But he has nothing on at all”!  This was whispered from person to person until everyone in the crowd was shouting that the emperor had nothing on. The emperor heard it and knew that they were correct but, with head held high, he finished the procession nonetheless.

Throughout this year, I haven’t been shy about my fears and concerns as they relate to the impact that Quantitative Easing is having on the markets.  I continue to feel the markets have been artificially inflated by easy monetary policy that simply isn’t sustainable.  In this case, the markets are being adorned with beautiful fabrics of money that are not only skin deep, but people are also afraid to admit they can’t see the benefit for fear of being seen as unwise or unfit. 

Unfortunately, I believe that we are only half-way through the story right now.   Advisors are still being sent to check out the material and conditions, returning with economic report after report, that the linens are fine and suitable for wearing.  The real test however, will come when we have to remove the Quantitative Easing and the economy is forced to parade down the street, naked.

This last point is important because investors need to understand that their retirement accounts real measure and their true self-worth will be known when Q.E. stops and our country is faced with the reality of as much as a $5 trillion dollar Fed Balance Sheet in return for some see-through economic stimulus.   

Waiting on strong recovery

"A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases"

US Economy stronger now

In her opening remarks, Yellen characterized the U.S. economy as “significantly stronger” than it was when the recession began six years ago and said the recovery “continues to improve.” She pointed to the turnaround in housing and strong auto sales as bright spots but added that the nation’s stubbornly high unemployment rate indicates “a labor market and economy performing far short of their potential.”

Janet Yellen to appear in documentary 'Money For Nothing'

Yellen appears in the movie 'Money for Nothing', along with a stellar group of current and former Fed officials including Charles Plosser, Jeffrey Lacker, Alan Blinder, Peter Fisher, Alice Rivlin, and the great Paul Volcker. (Prescient contrarians Jeremy Grantham, John Mauldin, Barry Ritholtz and Gary Shilling also have their say.)

Yellen says

“I pledge to do my upmost… to promote maximum employment, stable prices, and a strong and stable financial system. The Federal Reserve can help ensure that everyone has the opportunity to work hard and build a better life” 

Yellen’s comments were particularly notable. In the movie, she made a bold statement:

“It’s our job to guarantee that whatever happens to the federal deficit and debt…does not translate into inflation.” 

Obama nominates Janet Yellen for Fed chairwoman

President Obama nominated Janet Yellen to be Federal Reserve chairwoman. When she is, she will take office at a critical time. For the past quarter-century the Fed has accumulated more and more power. It has lowered interest rates to rescue plunging stock markets, and is now engaged in a vast experiment that’s adding $1 trillion to its balance sheet every year — with little to show for it.

Meanwhile, stock indexes keep hitting new highs on traders’ expectations that the Fed will keep doling out $85 billion a month in “quantitative easing,” which the Federal Open Market Committee voted to continue Wednesday.