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Strategy

Yellen: Economy Gaining Traction, Fed Easing…Easing


Official Portrait

Last week, Janet Yellen, chair of the Federal Reserve, gave her economic report before the Senate Committee on Banking, Housing, and Urban Affairs. Due to a winter storm earlier this month, the chair’s testimony had been delayed by two weeks. She first testified to the House Financial Services Committee on February 11, where she said it would take a notable change in outlook for the Federal Reserve to alter the gradual reduction of its monthly asset purchases, known as quantitative easing.

Chair Yellen’s Senate testimony focused on three broad themes: the current economic situation, the outlook on monetary policy and regulatory reform issues. Yellen said the economy began to gain traction in the latter half of 2013, although recovery in the labor market is far from complete.  The last two quarters saw a growth in household and business spending, with business investments picking up. Inflation remained low throughout the year.

There were several issues brought up during questioning. Most notable was the ongoing challenge of “Too Big To Fail” (TBTF). Senators Sherrod Brown (D-OH) and Elizabeth Warren (D-MA) both questioned when the Federal Reserve could “confidently” state that TBTF has ended. Chair Yellen stated, “I personally think we are making strides” in regards to TBTF, but there is no way to declare definitively it has ended.  She added we might not know for sure whether it’s ended until the next crisis. Yellen did say she is “committed to completing” TBTF reform measures.

There was also a debate on the influence that the Dodd-Frank Act has had on community banks. Sen. Joe Manchin (D-VA) cited a study that came out that day stating Dodd- Frank has had a negative impact on community banks, causing  13 percent of these banks to become unprofitable. Chair Yellen stated the Federal Reserve is attempting to tailor policies to ensure specifically that community banks are not being strained by Dodd Frank.

Several senators also expressed concern about the impact of Dodd-Frank on insurance companies. Chair Yellen said she recognized insurance companies are set up differently and stated the Federal Reserve is undertaking to create new “appropriate rules” for insurance companies. Republican Senators also noted that certain rulemakings, including the Volcker Rule, need additional clarification.

Dr. Yellen will chair her first Federal Reserve policy committee meeting on March 18-19.  At its last two meetings, the Fed had trimmed its monthly asset purchases by $10 billion and is now buying assets at a rate of $65 billion per month. It is expected that the Fed will reduce the pace of purchases to $55 billion per month at the upcoming March meeting.

Jordan Butcher is a Government Affairs intern at Financial Executives International and a student at Drury University.