Goldman's Post-Mortem Of Yellen's Second Day Of Congressional Testimony

Missed today's follow up Janet Yellen testimony before the Senate Banking Committee? Don't worry: you didn't miss much, all the bases were covered including winter weather during the winter, the Fed's complete cluelessness about what "full employment" means (because the definition changed thoroughly from December 2012 when it was 6.5%), what the "quantitative" definition of quantitive easing is (Yellen has no idea), why the Fed isn't subject to a haircut on its MBS holdings while all the other banks have to suffer under the intolerable Basel III 15% haircut (something to do with illiquidity of MBS, and specifically - something to do with the fact that the Fed has soaked up more than all net issuance of MBS in the past year, but don't worry - the Fed is on top of it), and, of course, Bitcoin.

For everything else, here is Goldman's post-mortem of Yellen's Day Two testimony.

BOTTOM LINE: There were few surprises from day two of Chair Yellen's semi-annual monetary policy testimony before the Senate Banking Committee (originally scheduled for February 13 but delayed due to snow). At the margin, she indicated a bit more concern about the soft recent data, though not to the degree of signaling an end to the QE tapering process.


1. Regarding the recent string of weaker economic data, Chair Yellen briefly deviated from her prepared text during her introductory remarks, and noted that "…a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point it is difficult to discern how much." Responding to a question from Senator Schumer on whether that Fed would cease tapering in light of the recent data, Yellen indicated that "if there's a significant change in the outlook, certainly we would be open to reconsidering, but I wouldn't want to jump to conclusions."

2. Yellen did not clearly indicate a preference for any specific change to the forward guidance. At different points in time during the Q&A, Yellen suggested several indicators to supplement the unemployment rate in assessing the amount of slack remaining in the labor market, including the number of individuals working part-time for economic reasons, the broader "U-6" measure of unemployment, the long-term unemployment rate, wage inflation, and labor market flows. She declined to provide any quantitative information on her view of what constitutes full employment.

3. On the potential approach to managing the Fed's expanded balance sheet during monetary policy exit, Yellen stated that "there is no need to bring down the size of our portfolio to tighten monetary policy. We have a range of tools that we can use to raise the level of short-term interest rates at the time the Committee deems appropriate." This was consistent with past statements from Chairman Bernanke and represents a change from the June 2011 exit strategy principles. We forecast portfolio reinvestments at least until the time the Fed starts increasing the funds rate.

4. When asked about potential imbalances in financial markets due to the stance of monetary policy, Yellen stated that "at this stage I don't see concerns." However, consistent with past statements from Federal Reserve officials, she did highlight "pockets of concern," including underwriting standards in leveraged lending and farmland prices.


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