Goldman’s Yellen Speech Post Mortem: “Nothing To See Here, Move Along”

Goldman Sachs listened (and read) Janet Yellen’s remarks at the IMF and see them “generally in line.” Despite waffling on for minutes about risk management and monitoring, no one at The Fed has mentioned the total carnage in the repo market, spike in fails-to-deliver, and record reverse repo window-dressing that just occurred. The use of the term “reach for yield” twice and “bubble” 5 times, and admission that the Fed should never have popped the housing bubble, leaves us less sanguine than Goldman and wondering if this was Janet’s subtle and nervous ‘irrational exuberance” moment.

 

Goldman thinks…

BOTTOM LINE: Fed Chair Janet Yellen spoke this morning on the role of financial stability concerns in monetary policy. Her remarks were mostly in line with her previous commentary on the issue.

MAIN POINTS:

1. Chair Yellen’s speech today focused on the role of financial stability concerns in monetary policy. Yellen argued that regulatory and supervisory measures are better suited to address financial stability concerns, and that monetary policy has limitations as a tool for promoting financial stability. As a result, Yellen concluded, she does not “presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns.”

2. Overall, Yellen argued, household debt growth has been moderate in recent years and leverage in the financial system has declined. However, she cautioned that she does see pockets of increased risk taking, such as in the leveraged loan market, which require continued monitoring. She also said that the Fed could consider other tools for promoting financial stability—“including adjustments to the stance of monetary policy”—as conditions change in the future.

3. Yellen also addressed the argument that the housing bubble could have been prevented by tighter monetary policy in the mid-2000s. She argued that monetary policy would have been an insufficient response and a “very blunt tool” for addressing rising house prices and leverage, while macroprudential policies would have been more direct and effective.