Fed poised for 3 rate hikes in 2017 following Yellen's Capitol Hill visit
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Since Janet YellenJanet Louise YellenTrump criticizes Fed for rate hikes in break with precedent Signs of global stress will test Federal Reserve on economy Who is the boss when it comes to Federal Reserve and Congress? MORE became chair of the Federal Reserve, there have been significant improvements in the key macroeconomic indicators. The unemployment rate has dropped from 6.6 percent to 4.8 percent, the inflation rate is 2.1 percent and the stock market is up by nearly 30 percent.

In December 2016, she raised the federal funds rate by a quarter of a percentage point — a sign of economic recovery and stability. Yellen has also seen a change of president and Congress, both now controlled by the same party that is pushing forward to fulfil election promises.    

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Yellen testified before the Senate Banking Committee Tuesday and the House Financial Services Committee Wednesday in her first semiannual monetary policy report to the new administration.

 

There were few surprises, as we have come to expect from Yellen’s steady and even handling of these meetings. Market expectations of a March rate hike increased only slightly from 30 percent before the Senate meeting to 34 percent afterward.

In her testimony, Yellen struck all the right notes:

    • The need to restore the federal discount rate — the interest rate charged to commercial banks for loans from their regional Federal Reserve Bank — as the active monetary policy tool again without waiting too long.
    • The plan to reduce the federal reserve balance sheet in a predictable and orderly manner after confidence that the discount rate is once again effective in affecting monetary policy is restored.
    • Commitment to work with any new regulatory supervision chief and the Treasury to reduce regulatory burden and support fiscal policy.
    • Fiscal policy should be good for the country and not bust our budget.
    • Loss of access to healthcare will have an impact on consumer spending.

Yellen also emphasised the progress made in financial reforms. Bank lending, even to small businesses, has expanded and remains robust despite Dodd-Frank regulation. U.S. banks are now in good shape — better capitalized, profitable and gaining market share from global counterparts. Consumers are better off and more protected since the 2008 financial crisis.  

From the line of questioning, it is clear that the Senate’s key concern is to establish alignment between the Fed and the administration as a basis for working together going forward. The Fed chair has clearly signalled agreement on core objectives and an open collaborative stance while maintaining the Fed’s independence and professionalism, even amid tough grilling from the House. 

So, where do we go from here? Depending on how the economy develops and how fast fiscal policy is shaped up and pushed through, the Fed might be able to affect three rate hikes this year. They will surely need more time to gain enough confidence to start reducing the federal reserve balance sheet.

The work to reduce regulatory burden has started with the easing of stress tests for regional banks, even before the Trump administration came into power. Intimate knowledge and experience with current regulations is needed to continue pruning back without compromising the progress we have made in the financial sector’s stability.

An even hand with an unfailing eye and care for the man on the street is surely in line with the president’s promise to Main Street and is a strong asset to guide our economy and financial system to greater health. 

The work that needs to be done will take time. A degree of certainty and continuity is necessary for businesses, both in the United States and globally, to plan, invest and grow. Yellen has signalled her commitment to complete her current term as Fed Chair.

Beyond that, it is still unclear what Fed leadership and decisionmaking might look like. Now that the excitement of the presidential election is over, perhaps it is time for the White House to signal its plans and its reciprocity to the Fed’s olive branch. The ball is now in the administration’s court.

 

Sumit Agarwal is the William G. Droms Term professor of finance at Georgetown University’s McDonough School of Business. For more information on Agarwal, visit www.ushakrisna.com


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