As Yellen Speaks, Changes Brew at the Fed

This morning, Fed Chair Janet Yellen delivered day one of the annual Humphrey-Hawkins testimony to Congress.

Yellen told the Senate Banking Committee (tomorrow it will be the House’s turn) that the central bank could consider raising short-term interest rates at its next policy meeting in March.

What would cause the Fed to bump the cost of capital again in just a few weeks’ time?

Here’s what Yellen told the committee:

“My colleagues on the [FOMC] and I expect the economy to continue to expand at a moderate pace, with the job market strengthening somewhat further and inflation gradually rising to 2%.”

This, according to Yellen, would warrant further gradual increases in the Federal Funds rate.

The conventional wisdom doesn’t think there will be a rate hike until May. (There’s just a 13% chance of a March hike, according the Fed Funds futures.) Of course, the Fed does have a way of making the conventional wisdom seem anything but wise.

Yet there is perhaps more-important news going on at the Fed that the markets are interested in.

That is, a key Fed official’s resignation last week … a resignation that gives President Trump the opportunity to reshape the Fed in his image.

On Friday, Federal Reserve board member Daniel Tarullo, a key official guiding bank regulation efforts, announced he will resign this spring.

This is important because it gives President Trump the opportunity to appoint Tarullo’s successor.

Here’s how AP Economic Writer Martin Crutsinger described it:

Trump is likely to choose someone more in line with his desires to roll back the regulations put in place by the Dodd-Frank Act, which overhauled bank supervision in the wake of the 2008 financial crisis.

That is the reason why this issue matters.

***

Already, the president has signed an executive order to begin the process of reforming the Dodd-Frank Act.

That issue caused a rollicking debate about financial industry regulatory rollbacks among Afternoon Edition readers. It’s also caused similar debates throughout the land.

With the Tarullo resignation, which will take effect on or about April 5, President Trump will have three vacancies on the Fed board to fill.

Currently, there are two vacant seats at our central bank. The reason why is because Congress basically refused to confirm two of President Obama’s nominees.

With Tarullo’s announced departure, Mr. Trump will have the chance to put his stamp on the Fed’s makeup in just his first few months in office.

Now, you may be asking yourself why the Tarullo resignation is so important here. Good question … and there is a good answer.

You see, part of the Dodd-Frank Act created a position of vice chairman for bank supervision.

That position was never filled by the Obama administration, and the reason was the rift between Democrats and Republicans in Congress over how to implement financial regulations.

Since no one officially had that job, Tarullo was acting as the de facto holder of the post. So basically, he served as the Fed’s point man on bank regulation since the Great Recession. Moreover, he did so firmly, and was a leading advocate of forcing banks to hold more capital.

U.S. bank stocks are up 5% this year, and stand to soar further as Dodd-Frank regulations unwind.

But with Tarullo leaving, President Trump is likely to tap a more deregulation-friendly Fed member. That likely means one step closer to Dodd-Frank reform of the sort Mr. Trump wants … and, frankly, that Wall Street wants.

In fact, Friday’s jump to all-time highs in the major averages was in part due to Tarullo’s resignation announcement.

And when the market speaks like that … we all need to listen.

***

If you would like to comment on this issue, or any of the issues we cover in the Afternoon Edition, all you have to do is leave me a comment on our website or send me an e-mail.

***

The markets started the day lower, but sweetened after Janet Yellen spoke. Bank stocks in particular felt the love, with the Financial Select Sector SPDR (XLF) gaining 1.1% and Goldman Sachs (GS) soaring to a new closing high, ending the day up 1.3% at $249.46. This helped the Dow to surge 0.5% in Valentine’s Day trade.

Speaking of sweets (and, perhaps, future gains), here are some fun facts about how people are planning to spoil their beloveds today:

• $18.2 billion: That’s how much the National Retail Federation expects consumers to spend in total on their valentines. That’s down slightly from last year’s $19.7 billion for candy, jewelry, cards, clothes, dinners and more.

• Got a thing for bling?: The NRF expects consumers to spend about $4.3 billion on jewelry this year, and half as much ($2 billion) on flowers. Investors took a shine to Tiffany & Co. (TIF) today, sending it 1.6% higher.

• 94% of people want to receive chocolate and/or other candy as a gift. (WalletHub) That’s good news, because the NRF says shoppers plan to spend $1.7 billion on candy this year.

• $16 billion and $10.1 billion: The first number is how much in product that chocolate-makers shipped last year. The latter is its non-chocolate (think nuts and other sweets) counterpart. (U.S. Census Bureau)

• 20% of people will buy presents for their pets. (WalletHub) That must not include food, because stocks like Blue Buffalo (BUFF), Freshpet (FRPT) and JM Smucker (SJM) all closed lower today. So did Nestle (NSRGY), which sells among other things Purina for pets as well as chocolate treats for humans.

• There are about 400 dating services in the U.S., employing about 2,500 people. That includes Internet sites like Match Group (MTCH). Unfortunately, Cupid’s arrow seems to have missed MTCH today, as the stock fell nearly 1% in Valentine’s Day trade. However, WalletHub expects new Match.com profiles to increase 20% the week after Valentine’s Day.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “As Yellen Speaks, Changes Brew at the Fed”

  1. It seems that everyone has forgotten that the base cause of the financial crisis was the government making banks give loans to those types that they formerly deemed unable to pay them back under the bipartisan “everyone should own a home” initiative. The unintended (for short-sighted politicians) consequences of this were that the banks then steamrolled the problem into a disaster by trying to recover bad loan money by selling those loans; ending up with the derivative mess. The banks were the fall guy for the politicians who caused the real problem. In the end, companies that fail should be allowed to rather than be propped up like GM, but in the case of the banks, with the government being the true cause of the failure, that becomes debatable. Really though, on a related subject, we need to ditch the Federal Reserve after a thorough audit which I believe will be very surprising; right now we have the foxes running the hen house with us supplying the hens.

  2. Instead of strengthening Dodd/Frank,the Triumph admin wants to gut even this weak regulatory law,inviting the next Wallstreet driven banking crises and economic collapse.

  3. A better solution is to do an Andrew Jackson and end the abject failure that is the central bank. Bring back real money.

Comments are closed.