Friday, December 13, 2013

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.