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Yellen Delivers Policy Report to Senate Committee

Economists and investors were keeping one eye Tuesday on the stream of earnings reports that being released and the other on the testimony of Federal Reserve Board Chair Janet Yellen before the Senate Committee on Banking Housing and Urban Affairs.

Yellen gave her semi-annual Monetary Policy Report and made the case that while the economy has seen improvement the economic recovery is still too fragile to deviate from the present course of Fed policy.

“Since the February Monetary Policy Report, further important progress has been made in restoring the economy to health and in strengthening the financial system. Too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed,” Yellen testified.

Notably, Yellen noted the recent cooling in housing as a sign. “The housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing.”

Prior to today’s testimony it was widely speculated that the Yellen may see the signs of improvement in the economy as a reason to take a less “dovish” approach in her testimony and begin to outline the conditions, and perhaps even a timeline for the Fed to begin interest rate normalization.

In light of the present conditions, it appears that interest rates will be staying at their historic lows for the time being but proponents of a rate hike were encouraged that Yellen noted the improvement in the labor market and the need to make rate decisions based on a number of economic indicators.

Another hot topic in today’s testimony was the Fed’s plan to end the third incarnation of its bond buying program, better known as Quantitative Easing or QE3. Yellen stressed that the Fed was on track to cease acquiring additional bonds by October and that it would take a very significant change in economic outlook to reverse course.

“If incoming data continue to support our expectation of ongoing improvement in labor market conditions and inflation moving back toward 2 percent, the Committee likely will make further measured reductions in the pace of asset purchases at upcoming meetings, with purchases concluding after the October meeting,”.

Ranking Senate Republican Mike Crapo (R-Idaho) reiterated his opposition to the QE program, echoing the sentiment of many Republican lawmakers. “The quadrupling of the size of the Fed’s balance sheet that has occurred as a result of the Fed’s QE purchases of Treasury and agency-backed mortgage-backed securities is worrisome.”

Senator Dean Heller (R-Nevada) pressed Yellen on whether there would ever be a need for the Fed to re-institute its bond purchasing program. Yellen was noncommittal, citing the need for flexibility but added that she hopes that the economy improves to the point where monetary policy can normalize.

The Fed chair will testify before the House Committee on Banking and Financial Services Wednesday morning, an exchange that has the potential to be somewhat more contentious in light of the recent legislation considered by the Republican controlled committee to require more transparency from the Fed and the general distrust of the Fed in some Republican circles. If today’s testimony is any indication, it is likely that Yellen will resist the additional scrutiny that House Republicans want to place on the central bank.

About Author: Derek Templeton

Derek Templeton is an attorney based in Dallas, Texas. He practices in the areas of real estate, financial services, and general corporate transactional law. His experience includes time as an Attorney Adviser for the U.S. Small Business Administration and as General Counsel for a nonprofit organization in Dallas. A self-avowed "policy junkie," he has a keen interest in the effect that evolving federal policy has on the mortgage, default servicing, and greater housing industries.
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