Federal Reserve chair Janet Yellen spent Tuesday morning speaking before the
Senate Banking Committee in the first of her two-day, semi-annual congressional testimony.
On the big issue dominating markets right now — Brexit — Yellen said a UK vote to leave the European Union could have “significant economic repercussions,” and create market volatility.
An exit from the EU could have a negative ripple effect on other economies in the region. Global markets rallied this week as polls showed the “Remain” camp gaining momentum.
Yellen didn’t recommend which way the vote should swing on Thursday, saying the Fed will be watching the economic fallout closely.
In opening remarks, Yellen repeated that the Fed will be cautious in raising interest rates, even as it expects data on growth, employment and inflation to improve. The fallout from a Brexit is just one thing that could tarnish this outlook.
None of this was new, since it was the fourth time in only a few weeks that Yellen addressed markets.
The Fed’s report also included a section on minority unemployment rates; during her last testimony, the Congressional Black Caucus grilled Yellen on how she’s addressing black unemployment.
Yellen said Tuesday that it’s important to the Fed that employment gains are broad-based, and that its own internal hiring makes room for diversity.
On a question about forward guidance, Yellen repeated that the Fed’s projections are not a commitment. Some critics have said the Fed lost credibility because the economy did not always evolve according to its forecasts.
Yellen countered an argument from Senator Bob Corker (R-Tennessee) that the Fed’s reinvestment of its bonds is effectively a fourth round of quantitative easing. To stoke money supply after the last financial crisis, the Fed embarked on several bond-buying rounds.
She said the Fed has the legal authority to use negative interest rates — another stimulative tool — but sees no need to use them in the US.
On Puerto Rico’s debt crisis, Yellen said the Fed’s authority is extremely limited, and it won’t be appropriate to grant loans.
US Sen. Elizabeth Warren (D-Massachusetts) asked whether the Fed would commit to enforcing consequences on the big banks if they fail to resolve problems identified in their living wills. Yellen declined to make a commitment, saying the Fed will consider the appropriate action if the October deadline is missed.
On Wednesday, Yellen will face the House Financial Services Committee.