What To Take Away From Yellen’s Senate Banking Committee Hearing

Janet Yellen, President Barack Obama’s nominee for Federal Reserve Chairman, made her first public appearance Thursday November 14, 2013 in front of the Senate Banking Committee.  Since her nomination, this was the first time Yellen answered questions regarding her views on the current economy.  Without surprise, the main subject of inquiry was Quantitative Easing (QE). 

Yellen held firm to her belief that the benefits of quantitative easing outweighed the costs of the program.  While economic indicators have shown improvement over the past months, the Fair Open Market Committee (FOMC) does not believe that the progress is not significant enough to begin tapering its bond buying.  The entire purpose of quantitative easing was to stimulate job creation. So far, job creation has been dismal and the only sector that has seen significant growth is the equity markets.  Yellen believes that labor market is showing meaningful progress but not to the point where stimulus is no longer necessary.  She did state that the program could not continue forever, a response to some of the critics that the program should have been wound down long ago.  

On the topic of asset bubbles, Yellen reiterated that the easing was not leading to asset bubbles in either the equities or Real Estate markets.  Since the implementation of QE, the Dow Jones index has risen from its 2009 low of 7,062.92 to 15,967.22 points as of 11/20/2013.  That is an increase of 8,904 points with little or no evidence other than QE to support its growth.   That drastic increase alone is enough proof to many sophisticated investors and institutions that QE is responsible.  Although the bottom line of quarterly company reports has increased, top line growth has been minimal.  In regards to the Real Estate market, in the middle of June we saw interest rates spike by over 1%.  This was due to the report released by the FOMC that a majority of its governance believed it was the right time to begin tapering QE.  The report lead to a large inflow of demand for housing primarily due to the fact that as interest rates rise, buyers using financing will have decreased purchasing power.  Recent housing market reports have shown this boom has begun to subside however historically over winter months, decreased demand is common.

Finally, in the hearing it was clear that Yellen differed greatly in the way she went about entertaining comments from the committee.  In regards to public speaking, there is an obvious difference in how she goes about answering questions.  Yellen takes the time to decipher and deconstruct every question.  She is very technical in her answers and accompanies them with her opinions.  Her character is drastically different from the current Federal Reserve Chairman, Ben Bernanke, who can be confrontational and forward which will be interesting to watch as our economy continues to struggle.