3 Things Janet Yellen Must Focus on as Fed Chair

2 minute read

This morning, Janet Yellen began her first testimony to Congress as Federal Reserve chair. As she sums up the economic health of the nation and the direction that monetary policy will take over the next couple of hours, there are three key things in her comments to focus on:

  • Despite previous hints that the Fed would consider the U.S. labor market healthy when unemployment dropped below 6.5 percent, Yellen is still cautious about pinning an interest rate hike on the jobs number alone. Indeed, she stressed that she wanted to see more healthy inflation in the economy (right now, we’re below the target of 2 percent) before monetary policy tightens up. Which means interest rates could stay low for a long time to come – the big question, though, is whether market rates will continue to follow the Fed’s “forward guidance,” or go their own way (likely up) as investors sense that winds are changing – that’s what happened last fall, and it had a dampening effect on the mortgage markets.
  • Yellen is all about clarity. One of her legacies is making Fed communication much clearer and more seamless than it had been, and you can see that again today in her comments – she’s telling us what’s already been done, what’s going to be done, and what might be done, in soothing tones. Again, though, the question is whether clarity and forward guidance can substitute for real ammo (meaning rate cuts and asset purchases). The Fed doesn’t have much of the latter left.
  • She’s watching financial markets carefully. That means she’s looking for bubbles and volatility (which, per her comments about the recent turmoil in the global markets, she doesn’t believe is too worrisome yet), but she’s also keeping a close eye on banks and banking reform. She still wants to see more capital and lower leverage ratios, quicker implementation of Dodd Frank, and a tighter global framework for reform. The Fed will be hosting a meeting next week on how banking reform should be strengthened – watch this space.
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