The Battle Has Begun: Yellen Casts The First Shot

by: John M. Mason

Summary

The Federal Reserve and the incoming Trump administration have been trading visions in recent weeks indicating that the two might be at substantial odds concerning monetary policy and fiscal policy.

Fed Chair Janet Yellen has now stepped out from the shadows and has set out the Fed position, its independence, and its goal to act in the public interest.

This speech from Ms. Yellen is sure to get a response from president-elect Trump and my guess is that it will not be a gentle one.

On January 15, I posted an article titled "Federal Reserve Watch: Preparing for the Battles of 2017."

Well, the battles have begun.

Janet Yellen, Chairman of the Board of Governors of the Federal Reserve System, in a speech to the Commonwealth Club in San Francisco, laid out the ground rules for the coming confrontation.

Ms. Yellen stated "the central bank's mission as a nonpartisan institution devoted to fostering a healthy economy free from short-term political pressures."

She followed this up by discussing the decision reached at the December meeting of the Federal Open Market Committee. She argued that "as of last month, she and most Fed officials expected to raise short-term interest rates a few times a year through 2019. In the officials' projections released after their mid-December meeting, they penciled in three quarter-percentage-point rate increases this year, and more in coming years that would leave their benchmark rate at 2.9% at the end of 2019." This from the article by David Harrison in the Wall Street Journal.

The incoming Trump administration has proposed that it would cut taxes and increase infrastructure spending to speed up economic growth. Although the economy has only been growing at a compound annual rate of 2.1 percent in the seven and one-half years of the current economic recovery, Mr. Trump has indicated that his programs will get the economy increasing in the 3.0 percent to 4.0 percent range.

Mr. Harrison continues that "On Tuesday, Fed governor Lael Brainard said interest-rate increases "would likely be more rapid than otherwise" if fiscal policies cause the labor market to tighten too much.

Mr. Harrison, in his Wall Street Journal piece, states that the Republicans in Congress would go even further: "Mr. Trump's victory also has emboldened Republicans on Capitol Hill who say they will try to enact legislation to tie the Fed's monetary policy to mathematical rules. Fed officials have said that would handcuff the central bank."

On the hearing of Ms. Yellen's position, bond yields rose…the yield on the 10-year US Treasury note closed today at 2.42 percent whereas it had closed on Tuesday at 2.32 percent. This is a substantial one-day rise.

The value of the US dollar also rose. At the market close today it took only $1.0637 to purchase one Euro. Yesterday at the close it took $1.0727 to buy a Euro. The dollar increased in value in other areas.

This movement is just the opposite of what president-elect Trump was shooting for the day before as he argued that the value of the dollar was too high and he wanted to see it drop to a more reasonable level.

Well, seems as if we have a conflict of what is going to go on in the future: the Fed versus the new administration.

My guess is that this confrontation will not be pleasant…and one worries about what might come out of it…especially as the Republicans control both houses in Congress. It is not going to be pretty. We'll see.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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