Grand Central: What We Learned From Yellen: Fed is Dug in on Raising Rates in 2015 – Real Time Economics

The Wall Street Journal’s Daily Report on Global Central Banks for Friday, July 17, 2015:

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Federal Reserve Chairwoman Janet Yellen has completed two days of testimony before Congress. What did we learn?

– The Fed is now heavily invested in moving short-term interest rates higher in 2015. It is the plan she and other officials have emphasized repeatedly they expect to follow. A first quarter U.S. economic contraction and turbulence in Greece and China haven’t persuaded them to shift their stance from this. So what would convince them to wait until 2016, as the International Monetary Fund is urging them to do and as several Democrats did during Ms. Yellen’s testimony Thursday? It would take a notable downshift in their forecasts for growth, jobs or inflation to move it away from that strategy.

– Ms. Yellen is also heavily invested in moving gradually once the Fed begins the process of raising rates. As Ms. Yellen acknowledged, the commitment to move gradually gives the Fed an incentive to start sooner rather than later so it can watch the effects of each move before moving on to the next. In her most interesting question-and-answer exchange, Ms. Yellen said Wednesday, “If we wait longer, it certainly could mean that when we begin to raise rates we might have to do so more rapidly, so an advantage to beginning a little bit earlier is that we might have a more gradual path of rate increases.” A gradual path, she added, was a prudent approach.

– She sees substantial progress on the jobs front, which has been her great preoccupation for years and which she says as the critical precursor to inflation beginning to firm. By almost any metric she observes, the job market is “demonstrably closer” to normal, she said Thursday, and she added several times she is seeing signs that wages may finally be picking up, including a meaningful pickup in the Labor Department’s employment cost index. Moreover she expects more improvement on the wage front. Why is the Fed not more concerned about developments in China and Greece? Because officials see improvements in the domestic economy.

– House Republicans are a thorn in Ms. Yellen’s side and she sees them as such. She pushed back when pressed Wednesday on a range of issues and the relationship showed few signs of improving. That means Ms. Yellen will continue to be pressed on a leak investigation by the House Financial Services Committee. Her interactions with Republicans and Democrats in the Senate were much more congenial Thursday. That included with Senate Banking Committee Chairman Richard Shelby and Republican Bob Corker from Tennessee. She might need to turn to those Senate relationships to avoid legislation that would curb the Fed’s powers or independence.

–By Jon Hilsenrath


Yellen Open to Raising SIFI Threshold. Federal Reserve Chairwoman Janet Yellen said Thursday she would support a “modest increase” in the asset-size threshold at which banks are hit with tougher rules and regulatory scrutiny. At issue is the $50 billion threshold set by the 2010 Dodd-Frank law at which a bank automatically qualifies for Fed supervision and regulation under a set of tougher capital, liquidity and other requirements such as participating in the Fed’s annual “stress test” exam. Mid-size regional banks that fall close that line have lobbied vigorously for a change. “I would be open to a modest increase in the threshold,” Ms. Yellen said Thursday during an appearance before his panel, the first time she has publicly endorsed the idea.

Yellen Sees Labor Market ‘Demonstrably Closer’ to Normal. Ms. Yellen, speaking to the Senate Banking Committee a day after appearing before the House Financial Services Committee, repeated that the Fed is likely to raise interest rates this year if the economy keeps improving and again avoided specifying exactly when liftoff might occur.

New Fed Overhaul Bill Coming. House Financial Services Committee Chairman Jeb Hensarling (R., Texas) said Thursday his committee is preparing a new bill to overhaul a broad range of the Fed’s operations. The panel’s GOP members have previously introduced and approved at the committee level similar legislation, but Mr. Hensarling said that he’s preparing some “modifications and expansions.” He offered no other details. –Dow Jones Newswires

ECB Raises Emergency Lending to Greek Banks. The European Central Bank Thursday raised its emergency lending to Greek banks by €900 million ($989 million), a move that could pave the way for the country’s lenders to reopen. Announcing the decision in a news conference, ECB President Mario Draghi said it was a response to “several positive things that have happened” in Greece’s negotiations with creditors on a third bailout program.

– Recap: Our live blog of the ECB Press Conference

BOE’s Carney: U.K. Rate Decision Could Become Clearer in at Turn of Year. The Bank of England’s decision on when to start raising interest rates is likely to become clearer around the turn of the year, but any increases are likely to be gradual and limited to a level below past averages, BOE Governor Mark Carney said Thursday. His comments suggest central bank officials may be prepared to tighten monetary policy earlier than expected. Investors currently expect the central bank to hold off a rate rise until the middle of next year, according to interest-rate derivatives that track the BOE’s benchmark rate, which has been held at a record low 0.5% since early 2009.

BOE Urges Longer Jail Terms for Market Manipulators. The Bank of England recommended lengthier jail sentences for traders found guilty of manipulating financial markets, as part of a sweeping review into how to stamp out market abuse following a series of scandals. The BOE said in its Fair and Effective Markets Review that traders convicted of market manipulation should face up to 10 years in jail, in line with penalties for fraud and similar financial crimes. The maximum sentence is currently seven years.

ECB Survey Shows Eurozone Inflation Below Target for Some Time to Come. Forecasters polled by the European Central Bank only slightly raised their inflation outlook for this year and next year, a report published by the central bank showed on Friday. The predictions signal continued weakness on the inflation front and likely underscore the need for the ECB to continue with its quantitative easing program in an effort to push inflation closer to the ECB’s target of just below 2%. The Survey of Professional Forecasters now sees inflation in the currency bloc at 0.2% this year, a 0.1 percentage point upward revision from the previous forecast in April.

Hungary’s Central Bank Buys Titian Painting for $15.8 Million. Hungary’s central bank has bought a painting by 16th century Italian artist Titian for 4.5 billion forints ($15.8 million), the highest amount it has spent on a work of art under its art-collection program.The central bank purchased “Mary and Child with St. Paul” from an unnamed Hungarian collector, according to a statement on the bank’s website. The painting, the most valuable in a Hungarian private collection, is “artistically the most significant among the works of art that have surfaced in Hungary over the past half a century,” the central bank said.


WSJ Survey: Most Economists Expect Fed Will Move in September. Most private forecasters polled continue to expect the Federal Reserve to start raising short-term interest rates in September, though a growing number think the central bank will wait until December. About 82% of economists surveyed over the past week by The Wall Street Journal picked September for the first rate rise, while 15% said the Fed would wait until December. In last month’s survey, 72% chose September and 9% went for December.



– 8:30 a.m. EDT: U.S. Labor Department releases consumer-price index for June

– 10 a.m. EDT: Fed’s Fischer speaks at the U.S. Chamber of Commerce in Washington


Do Changing Worker Characteristics Explain Low Wage Growth? No, the Atlanta Fed’s John Robertson and Ellyn Terry conclude. “Composition effects do not account for the low median wage growth experienced in recent years. Holding worker and job characteristics fixed at their 1997 shares raises the median wage growth in 2014 by only about 0.2 percentage point,” they write.

Foreclosures and Consumer Credit. People going through foreclosures who stopped paying their mortgages while continuing to live in their homes were better able to pay off their credit cards, write economists from the Philadelphia Fed. “A longer period of nonpayment of mortgage expenses results in higher cure rates on delinquent credit cards and reduced credit card balances. Foreclosure process delays may have mitigated the impact of the economic downturn on credit card default.”



Greg Ip: The Fed’s Risk Management Case for Raising Rates Soon. There once was a time when the Fed worried about raising rates too soon. Today, Greg Ip writes, there are more risks associated with waiting too long. “If they raise rates by a quarter percentage point now, they can wait several quarters before tightening again to make sure the economy can stand it. But if they wait longer, unemployment drops below 5% and wages and prices abruptly accelerate, they may feel pressured to hike rates rapidly. That could be quite disruptive to a financial system grown fat on six years of free money.”



– U.S. Home Builder Confidence Hits Highest Level Since 2005. An index of builder confidence in the market for new single-family homes stood at a seasonally adjusted level of 60 in July, the National Association of Home Builders said Thursday.

White House Again Raises Debt Projections. Last July, when the White House first revised down its growth forecast, that bumped up the debt-to-GDP ratio to 72% for 2024. This February, that figure rose to 73.5%. And on Tuesday, the latest estimate said the debt-to-GDP ratio would stand at 74.6%.

U.S. Jobless Claims Fall. Initial jobless claims, a proxy for layoffs, fell 15,000 to a seasonally-adjusted 281,000 in the week ended July 11, the Labor Department said Thursday.


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17 July 2015 | 11:34 am – Source:


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