Today was the second and final day of Janet Yellen's semiannual congressional testimony, after which she was said to have promptly departed to meet her colleagues in Basel, where they the world's key central bankers would meet the outcome of the Brexit vote together on the 18th floor of the BIS tower.
But first she had to slog through three hours of repetitive, redundant, and absolutely meaningless questioning.
Among the highlights was yet another bipolar shift in Yellen's demeanor who after last week's dramatically gloomy - and dovish - FOMC press conference, shifted into optimism mode and said she believes the recent weakness in job creation is "transitory" and does not reflect an otherwise growing economy. "We are seeing a pickup in growth. There's been a sharp increase in consumer spending," Yellen told the House Financial Services Committee. "I'm very hopeful that we will see a pickup in growth. We will be watching for that as we assess the economy."
Then there was a fiery exchange with Committee Chairman Jeb Hensarling, who aggressively questioned Yellen over why the rate the Fed pays for reserves that banks store at the central bank is higher than the overnight funds rate, saying that the Fed's IOER subsidy which is above the Fed Funds rate violates a congressional statute.
HENSARLING: Today, you are paying 50 basis points on interest on excess reserves. The Fed funds rate yesterday, I believe, is 38 basis points. Is that correct? So, you're paying about a 35 percent premium on excess reserves. You're paying a premium to some of the largest banks in America, is that correct
YELLEN: Well, I consider a 12 basis point difference to be really quite small and in line with the general level of interest rates.
HENSARLING: OK. So, you believe you have the legal authority to do this, otherwise you wouldn't do it, is that correct?
YELLEN: Well, I do believe we have the legal authority to do it.
HENSARLING: Would it be legal for you to pay a 50 percent premium? You're paying a 35 percent premium today. Would it be legal to pay 100 percent premium?
And so on. Then there was the question posed by Rep. Huizenga of stress testing the Fed's $4.5 trillion balance sheet, specifically in the context of the massive duration risk which according to some estimates is about $2.5 billion DV01. To wit:
HUIZENGA: Given your belief in the value of stress testing, would you agree that it also would be appropriate to stress test the Fed's balance sheet with a $4.5 trillion portfolio, to make sure that the risk to the Fed, the treasury and the economy as a whole, if the Fed decides in the future that it's best to shrink its balance sheet faster than it's currently expected? Do you believe that -- that the Fed is exposed with this $4.5 trillion balance sheet to considerable interest rate duration risk leading to loss of income as you unwind?
YELLEN: It is very unlikely that the Fed would end up with negative income. It is conceivable. There is a scenario in which the U.S. economy grows very strongly, and in order to avoid overheating, the Fed needs to raise short-term interest rates at a much more likely - at a much steeper pace than we consider likely to be appropriate. And in that scenario, it is conceivable that we would end up paying more for reserves than we earn on our -- in our assets. It's very unlikely.
Coming from Yellen, it means it is 100% guaranteed.
We saved the best two exchanges for last. In the first one, Rep. Andy Barr asked Yellen if she has any idea why growth has been disappointing, and if the Fed's constantly wrong growth forecasts are the reason.
BARR: In your prepared remarks, you indicated that business investment was surprisingly weak. Maybe the reason why the Fed is surprised and continued to miss on forecasts. And the Fed as the Washington journal pointed out, estimated 2.4 percent growth in December, that had fallen to 2.2 percent by March. This month, it was down to 2 percent. And it follows the Federal Reserve's consistent record of forecasting error from a standpoint of predicting stronger growth than is actually occurring.... I would like you to comment on that."
YELLEN: Well, growth has been disappointing. I'm not sure of the reason. But our forecasts of the unemployment rate and progress in the labor market have been pretty close. And we have seen a lot of job creation, firms that are doing relatively little investing are doing a lot of - are doing a lot of hiring.
And there's your reason.
However, the best, and last, Q&A was with California Rep. Edward Royce who asked whether the Fed was merely propping up stock prices.
ROYCE: I'm worried that the Federal Reserve has created a third pillar of monetary policy, that of a stable and rising stock market. And I say that because then-Chairman Bernanke, when he appeared here, stated repeatedly that, "the goal of QE was to increase asset prices like the stock market to create a wealth effect." That seems as though that was goal. It would stand to reason then that in deciding to raise rates and reduce the Fed's QE balance sheet standing at a still record $4.5 trillion, one would have to be prepared to accept the opposite result, a declining stock market and a slight deflation of the asset bubble that QE created. Yet, every time in the past three years when there has been a hint of raising rates and the stock market has declined accordingly, the Fed has cited stock market volatility as one of the reasons to stay the course and hold rates at zero. So indeed, the Fed has backed away so many times from rate normalization that - and I think this is a conceptual problem here that the market now expects stock market volatility to diminish the odds of a rate increase. So Madame Chair, is having a stable and rising stock market a third pillar or the Federal Reserve's monetary policy if I go back to what I originally heard Ben Bernanke articulate?
YELLEN: It is not a third pillar of monetary policy. We do not target the level of stock prices. That is not an appropriate thing for us to do.
What Royce, who as noted above remarked explicitly about the "asset bubble that QE created", is talking about is the nightmarish merry go round, first shown here a month ago.
As for Yellen's response, it is not even worthy of a comment.
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The full 3+ hour testimony is below.