This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Yellen's Dilemma Is Getting People Used to Perpetual Uncertainty

NEW YORK (TheStreet) -- Federal Reserve Chair Janet Yellen was in front of Congress again this week. And Congress wants to know what the Fed is going to do.

If you are the chair of the Fed, how do you tell a Congressional panel that you don't know what is going to happen -- or what you are going to do? The fact is that the Fed has never been in a situation like the one it is now facing.

And the situation is tough. The economy is now in its fifth year of recovery, although the recovery has been one of the weakest on record. The labor force participation rate is at its lowest level in the past 40 years, something that will not be turned around by the usual economic stimulus. Bank lending continues to be modest in terms of producing real economic growth. The federal government is at a standstill, given the gridlock in Congress and the fact that the president appears to have entered the lame-duck phase. And the commercial banking system has more that $2.6 trillion in excess reserves sitting on its balance sheet.

Former Ford CEO Alan Mulally Joins Google Board

Has Microsoft Created the Apple Store of the Future?

10 Best Used Luxury Cars Under $30,000

Seattle Genetics Nearing Key Test for Investor Confidence

It is understandable that everyone wants to know what the Fed is going to do about it.

The Fed has announced that the current round of quantitative easing will end in October. But that just means that the Fed will not be acquiring a certain amount of securities every month on a regular basis.

Will the Fed then begin to raise interest rates?

Yesterday, Yellen told the Senate Banking Committee, "If the labor market continues to improve more quickly than anticipated... then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned." Watch TheStreet's Economics Correspondent Joseph Deaux break down Yellen's Testimony:

WATCH: More market update videos on TheStreet TV | More videos from Joe Deaux

So what does that mean?

Well, there are two ways that interest rates can rise: either demand increases or supply declines.

There is next to no demand for federal funds these days. There is little demand for loans, so the commercial banks are not seeking funds to meet market demands for loans. And this year the effective federal funds rate has rested below 10 basis points, reflecting no pressure at all in the market.

In terms of supply, there are $2.6 trillion in excess reserves in the banking system. Is the Fed going to remove reserves from the banking system until the lack of supply becomes sufficient to cause the federal funds rate to rise?

Or are there other means of pushing up the federal funds rate? For example, could the Fed increase bank reserve requirements to reduce "excess" reserves? The Fed did this in 1937 -- with disastrous results.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs