Yellen for the Comeback
Yesterday, presumptive President-elect Joe Biden reportedly indicated former Federal Reserve Chair Janet Yellen as his pick for Treasury Secretary. If confirmed by the Senate, Yellen would be-come the first woman to hold the position and the first person to have headed the Trea-sury, the cen-tral bank and the White House Coun-cil of Eco-nomic Ad-vis-ers.
As Trea-sury Sec-re-tary, who is fifth in the pres-i-den-tial line of suc-ces-sion, Yellen will oversee everything from tax col-lec-tion to pub-lic-debt man-age-ment to the im-ple-men-ta-tion of in-ternational sanc-tions. Near term, however, the most pressing component of the job will be oversight and management of the economic recovery. Yellen is seen as a very credible choice for the position overall and specifically, well equipped to drive the recovery from the destruction caused by the pandemic as she helped navigate the country in the aftermath of the Great Recession. Recall, Yellen was Vice Chair of the Federal Reserve from 2010 to 2014 and Chair of the central bank from 2014 to 2018.
Not only does her resume speak for itself in terms of qualifications, her earlier positions come with extensive re-la-tion-ships. Yellen is said to be both well acquainted and highly re-garded by for-eign fi-nance ministers and cen-tral bankers, which the Biden administration no doubts sees as essential to building relationships with overseas officials and allies.
While considered a dove from a monetary perspective and left of center on the political spectrum, Yellen is nevertheless not necessarily seen as a controversial pick. In 2014, Yellen was con-firmed with bi-par-ti-san sup-port as Chair, and four years earlier as Vice Chair. Before announcing his selection, the Biden administration noted last week that his pick for Treasury Secretary would be broadly ac-cepted by both the lib-eral and mod-er-ate wings of the De-mo-c-ra-tic Party, a middle ground he hopes to achieve with the former Fed Chair.
As far as the issues, regarding additional fiscal support, Yellen has recently voiced support for further stimulus for fear of an “uneven and lackluster” recovery if Congress fails to act with additional spending for workers and small businesses. Speaking in late September, Yellen said, “There is a huge amount of suf-fer-ing out there. The econ-omy needs the spend-ing.” Yellen’s call for further aid bodes well for those hoping to reach an agreement near term on a fifth-round stimulus package.
As a Fed member, the mandates for the central bank are clear: stable prices and full employment. However, Yellen has historically been vocal on the growing disparity of wealth and growth in the U.S. She has also drawn attention to the potential benefits from government policies aimed at increasing female participation in the labor force. As a central banker there was little Yellen could offer in terms of policy initiatives on these topics, limitations the Secretary of Treasury would not equally face.
Yellen has also spoken in favor of a car-bon tax as the most ef-fec-tive way to re-duce green-house-gas emissions and tackle cli-mate change. Yellen has also warned of long-standing issues with China, such as sub-si-dies to state-owned en-ter-prises and com-pe-ti-tion for new tech-nolo-gies with sig-nif-i-cant na-tional-security implications that have not yet been addressed.
On the regulatory front, Yellen has strongly de-fended ef-forts to im-prove bank su-per-vi-sion fol-low-ing the 2008 fi-nan-cial cri-sis. Yellen has also criticized the 2010 Dodd-Frank Act for failing to offer regulators better tools to address risks that threatened the broader financial system. Arguably most important, however, Yellen offers a welcome alternative to Senator Elizabeth Warren who has repeatedly pledged to clip big banks with a tighter financial policy regime, an agenda which was widely viewed as negative by Wall Street.
And of course, one of Yellen’s first de-ci-sions, in coordination with Chairman Powell, could be to re-ac-ti-vate a se-ries of lend-ing back-stops which are set to expire at year-end. Recall last week, Treasury Secretary Steven Mnuchin announced plans to allow some emergency Fed programs including the Main Street Lending Program to expire at year-end. Rather than offering a renewal, Mnuchin indicated that the programs "have clearly achieved their objectives." Meanwhile, the Federal Reserve responded that it "would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy."
The programs were always intended to be temporary, although the timing of the Secretary’s decision may be somewhat unfortunate given the economy remains extremely fragile with indications of waning momentum, particularly on the consumer front along with the added risk of rising COVID-19 caseloads and looming restrictions threatening to undermine the progress made since the second quarter. In fact, depending on the depth and duration of the second-round resurgence and the subsequent policy response, the U.S. economy could slow significantly or potentially fall back into negative territory, creating a second-round recession.
In many cases, such as cor-po-rate-debt back-stops, the programs were little used. Rather, the mere an-nounce-ment of the Fed back-stop was enough to provide support to the market and confidence to investors to buy as-sets. That being said, the Fed does still have a number of tools remaining in its tool belt to add additional support to the market as needed including further asset purchases, explicit forward guidance and yield curve targeting. Furthermore, should “unusual or exigent” circumstances arise, the Treasury Secretary could always agree to reinstate the loan programs. It is also pos-si-ble for the Biden ad-min-is-tra-tion and the Fed to agree to re-sume the lend-ing pro-grams af-ter the new administration is presumably sworn in on January 20.
Despite displeasure, the Fed has said it will comply with the Treasury’s request to return unused funds – monies which could be used as an additional bargaining chip in the ongoing negotiations of a potential fifth-round spending package. Although, as a result, the Fed is widely expected to unveil additional policy support when it meets on December 15-16.
Overnight futures gained on the prospect of a friendly face heading the Office of Treasury and with the Biden administration now beginning its transition. This morning, equities are up 1.0%, currently trading at 29,895.27 as of 9:30am ET.
Later today, at 2:00pm ET, President Trump will present the Thanksgiving turkey in the Rose Garden.
Speaking of the upcoming holiday, last week, the CDC urged Americans not to travel or spend Thanksgiving with people outside their household. But whether due to “pandemic fatigue” or holiday spirit, many Americans don’t seem to be heeding the warning. With more than 3M people passing through U.S. airports last weekend, according to the TSA, the latest rise in travel marks the busiest weekend since mid-March. Likewise, the American Automobile Association has forecast that 45M-50M people will take to the highways over the holiday. Of course, one weekend is hardly enough to offset the decline in activity since March, and according to the International Air Transport Association (IATA), carriers will lose almost $39 billion in 2021, more than double the forecast in June.
Meanwhile, the risk of exposure continues to rise with experts worried caseloads may skyrocket following the Thanksgiving holiday. According to Johns Hopkins, new coronavirus cases in the U.S. have already surged to all-time highs, averaging more than 170,000 per day. Deaths have also increased to over 1,500 a day, the highest level since the spring.
While the virus itself is a concern from a health standpoint, from an economic standpoint, rising caseloads leading to stressed health care and hospitals systems could prompt further legislative responses across the country. Further restrictions and lockdown measures will only serve to exacerbate the pressure on businesses and workers still reeling from the hardship of the past nine months.
Yesterday, the Chicago Fed National Activity Index unexpectedly rose from 0.32, revised up from 0.27, to 0.83 in October, a two-month high. According to Bloomberg, the index was expected to remain at 0.27 for the second consecutive month. The Chicago Fed National Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In October, 61 of the 85 monthly individual indicators made positive contributions, while 24 made negative contributions.
This morning, the FHFA House Price Index rose 1.7% in September, an all-time high. According to Bloomberg, the index was expected to rise 0.8% at the end of Q3.
The S&P Case Shiller 20-City Home Price Index increased 1.27% in September, more than the 0.70% gain expected, according to Bloomberg, and following a 1.35% rise the month prior. Year-over-year, home prices rose 6.57%, the most since April 2018.
Additionally this morning, the Conference Board’s Consumer Confidence Index declined from 100.9 to 96.1 in November, more than the expected decline to 98.0, according to Bloomberg, and a three-month low. In the details, present situation fell from 106.2 105.9, and consumer expectations declined from 98.2 to 89.5, a three-month low.
Finally this morning, the Richmond Fed Index dropped from 29 to a reading of 15 in November, more than the expected decline to 20, according to Bloomberg, and a four-month low.
There are also a number of Fed speakers scheduled to speak today. At 11:00 a.m. ET, St. Louis Fed President James Bullard will take part in a Bank of Finland monetary policy webinar. At 12:00 p.m. ET, New York Fed President John Williams will take part in a moderated discussion at a Wall Street Journal online event, and at 12:45 p.m. ET, Fed Vice Chair Richard Clarida will take part in a panel hosted by the IMF.
Tomorrow, GDP is expected to be unrevised at 33.1% in the second-round report, initial jobless claims are expected to decline from 742k to 730k in the week ending November 21, and durable goods orders are expected to rise 0.9% in October, down from the 1.9% gain in September. Also, the PCE is expected to be flat in October and rise 1.2% over the past 12 months, and the core PCE is also expected to be flat at the end of Q3 and rise 1.4% year-over-year. Additionally, new home sales are expected to rise 1.7% from 959k to a 975k unit pace in October.
-Lindsey Piegza, Ph.D., Chief Economist