Yellen Will Raise Rates and Won't Quit, but Sounds Skeptical on Fiscal Stimulus

Janet Yellen, who rarely raises her voice, is not going quietly into the Trump era.

The 70-year-old Federal Reserve chair said at a congressional hearing that she has no intention of leaving before her term expires, despite criticism from President-elect Donald Trump. She confirmed that the central bank is likely to begin raising interest rates soon in response to an improving economy. And she threw cold water on the president-elect's overtures toward fiscal stimulus and weakening the Dodd-Frank financial reforms passed in the wake of 2008's financial crisis.

"I was confirmed by the Senate to a four-year term," said Yellen, whose appointment runs through January 2018. "I fully intend to serve out that term.''

The chair's prepared testimony followed a path familiar to Fed watchers. It emphasized the improvement in the labor market while pointing out that this year's gains in work force participation suggested that the economy had been suffering from more slack than previously believed. She said those conditions bolster the central bank's generally accommodative monetary policy, which economists and traders believe will include raising the federal funds rate in December and probably twice more next year. Three hikes would bring the central bank's target rate for federal funds to as high as 1.25%.

The Fed's Open Market Committee "continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability," Yellen told the Joint Economic Committee of Congress.

Yellen said global growth should firm next year, in part because of very lax monetary policies by overseas central banks.

That could help exporters like Boeing (BA) and Action Alerts PLUS holding General Electric (GE) .

During the question-and-answer session, Yellen showed some willingness to wade toward, if not into, the political and policy fights sure to spring up on Capitol Hill next year.

A big stimulus package could have an unwelcome effect on inflation, Yellen said under questioning from New York Democratic Rep. Carolyn Maloney.

"Such a package could have inflationary consequences,'' she said, noting that the surge in 10-year Treasury interest rates -- and the matching fall in Treasury bond prices -- since Trump's Nov. 8 election was "consistent with that point of view."

Answering a question from committee chair Sen. Dan Coats, an Indiana Republican who is retiring at year's end, Yellen said a near-full-employment economy doesn't need nearly as much stimulus as the nation did in 2009, after the financial crisis, when the unemployment rate was 8.3% and careening toward 10%.

"We're no longer in that state," she said.

Congress should look at stimulus plans with an eye on the nation's long-term debt level and preserve its ability to respond to future economic shocks with cash infusions, she said. "There's not a lot of fiscal space" if a future rescue is needed, she said. 

Yellen also urged Congress to consider whether any stimulus package would promote productivity growth, which has been much weaker than historical norms for the last decade.

Yellen's remarks about stimulus were a marked departure from the thinly veiled pleas her predecessor, Ben Bernanke, used to issue to Congress to spend more money to speed up the pace of the economic expansion.

Yellen was equally direct in defending the Dodd-Frank law, which Trump has criticized. Speculation about changes to the statute have been driving gains in bank shares like Bank of America (BAC) , JPMorgan Chase (JPM) and Action Alerts PLUS holding Wells Fargo (WFC) over the last week.

But the Fed chair said the law has reduced the odds of a 2008-like financial crisis in the future.

"I certainly would not want to see the clock turned back," Yellen said. The Dodd-Frank reforms have brought welcome changes in capital requirements and in the transparency of riskier derivatives trading, she said. The law's provisions for dealing with troubled banks have changed banks' cultures to become more cautious, she added.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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