President Obama’s nominee to chair the Federal Reserve, current Federal Reserve Vice-Chair Janet Yellen, appeared before the Senate this week for her confirmation hearings. For investors, this hearing offered clues about the direction the Federal Reserve is likely to take with monetary policy.
Significantly, Janet Yellen told the Senate banking committee that “It’s important not to remove support, especially when the recovery is fragile.” Further, in case there are any doubts about the current state of the economy, Ms. Yellen stated “we have farther to go to regain the ground lost in the crisis and the recession….For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery.” She went on to say that she considers “…it imperative that we do what we can to promote a very strong recovery,” adding that the benefits of the Fed’s $85bn a month asset purchase program outweighed the costs.
The good news for investors is that Ms. Yellen confirmed her desire for policy continuity by following Chairman Bernanke’s policy regarding quantitative easing. To us at Chevy Chase Trust, this is an indication that any tapering of bond purchases by the Fed is likely to be postponed further, as Ms. Yellen downplayed the existence of current asset bubbles . This illustrates continued reluctance of the Fed to use monetary policy to slow asset price inflation, a stance that goes back to the beginning of Alan Greenspan’s tenure in 1987.
With the S&P 500 moving to a record high following the hearings, stock markets interpreted these remarks as bullish. The old adage of “Don’t Fight the Fed” would seem to be as appropriate as ever in today’s environment.