Janet Yellen strikes hawkish tone on interest rate rises

US treasury yields jumped on Tuesday after Federal Reserve chairwoman Janet Yellen said it would be unwise to wait too long to raise interest rates, striking a more hawkish tone than investors expected.

The US central bank will likely need to raise rates at an upcoming meeting, Ms Yellen said, although she flagged considerable uncertainty over economic policy under the Trump administration.

Ms Yellen said delaying rate increases could leave the Fed’s policymaking committee behind the curve and eventually lead it to hike rates quickly, which she said could cause a recession.

In her testimony, she also urged Congress to focus on policies aimed at improving the productivity of the US economy rather than increasing short-term growth.

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The Trump administration’s economic plans have clouded the Fed’s outlook. Trump has repeatedly called for measures to stimulate economic growth, like tax cuts and infrastructure spending.

Fed officials, who take the view the economy already is growing at something close to the maximum sustainable pace, have cautioned that fiscal policy should focus on improving long-term growth. If fiscal policymakers provide short-term stimulus, Fed officials have said the central bank would seek to offset the effects by increasing interest rates more quickly.

Benchmark 10-year notes were last night yielding 2.47 per cent, after earlier rising as high as 2.5 per cent, the highest since February 3rd.

Wall Street

The Fed chairwoman defended the bank’s oversight of Wall Street in the years since the financial crisis, arguing banks are safer, have kept lending and remain profitable, despite claims by the Trump administration and Republican lawmakers that regulations have crippled economic growth.

In congressional testimony on Tuesday, she disputed the notion the Dodd-Frank Act had made US lenders less competitive, stating that they were in far better shape than European rivals.

Ms Yellen also defended the Fed’s annual assessments of whether the banks can survive severe economic slumps, saying stress tests have been key to boosting financial stability. And she said she has seen little data substantiating assertions that small businesses can’t get loans, a frequent Republican attack on Dodd-Frank. “I see well-capitalised banks that are regarded as safe, strong and sound,” Ms Yellen told members of the Senate Banking Committee. US lenders are “capturing market share”, she added.

Her comments come as Republicans and Trump set their sights on rules that they blame for paralysing the US economy. Trump, who has called Dodd-Frank a “disaster”, signed an executive order earlier this month instructing the treasury department to examine financial rules and file a report on its findings within 120 days.

Ms Yellen said that she looks forward to working with treasury secretary Steven Mnuchin on the review.

She told lawmakers on Tuesday she agrees with the principles outlined in the administration’s executive order, which include preventing taxpayer bailouts of banks, making regulations more efficient and targeting government policies that might encourage financial executives to take undue risks.

Core principles

“I certainly do agree with the core principles,” Ms Yellen said. “They enunciate very important goals for our financial system.”

Ms Yellen laid out some of her plans for how she’ll treat a Trump appointee to the never-filled Fed role of vice-chairman for supervision, which was created by Dodd-Frank, including allowing the person to represent the Fed in international talks over bank rules.

While pointing out that rulemaking is the responsibility of the entire Fed board, Ms Yellen said the vice-chairman will lead the board’s bank-supervision committee, personally update Congress on the Fed’s regulatory work and represent the Fed before international bodies such as the Basel Committee on Banking Supervision.

But the Fed chairwoman, who was appointed by Barack Obama, said she won't leave the bank until her term expires in about 12 months. That means that even a vice-chairman picked by Trump may have to temporarily defer to her on bank oversight, because the chairman controls the Fed's agenda. – (Bloomberg/New York Times 2017)