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42 YELLEN DELIVERS POLICY REPORT TO CONGRESS Economists and investors were keeping one eye on the stream of earnings reports be- ing released and the other on the testimony of Federal Reserve Board chair Janet Yellen before the Senate Committee on Banking Housing and Urban Affairs in mid-July. Yellen gave her semi-annual Monetary Policy Report and made the case that while the economy has seen improvement, the economic recovery is still too fragile to deviate from the present course of Fed policy. "Since the February Monetary Policy Report, further important progress has been made in restoring the economy to health and in strengthening the financial system. Too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed," Yellen testified. Notably, Yellen pointed to the recent cooling in housing as a sign. "e housing sector, however, has shown little recent progress. While this sector has recovered notably from its earlier trough, hous- ing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing." Prior to her testimony, it was widely speculat- ed that Yellen may see the signs of improvement in the economy as a reason to take a less "dovish" approach in her testimony and begin to outline the conditions, and perhaps even a timeline for the Fed to begin interest rate normalization. In light of the present conditions, it appears that interest rates will be staying at their historic lows for the time being, but proponents of a rate hike were encouraged that Yellen noted the improvement in the labor market and the need to make rate decisions based on a number of economic indicators. Another hot topic in her testimony was the Fed's plan to end the third incarnation of its bond buying program, better known as Quantitative Easing, or QE3. Yellen stressed that the Fed was on track to cease acquiring additional bonds by October, and that it would take a very significant change in economic outlook to reverse course. "If incoming data continue to support our expectation of ongoing improvement in labor market conditions and inflation moving back toward 2 percent, the committee likely will make further measured reductions in the pace of asset purchases at upcoming meetings, with purchases concluding after the October meeting," she said. Ranking Senate Republican Mike Crapo (R-Idaho) reiterated his opposition to the QE program, echoing the sentiment of many Republican lawmakers. "e quadrupling of the size of the Fed's balance sheet that has occurred as a result of the Fed's QE purchases of Treasury and agency-backed mortgage-backed securities is worrisome," he said. Senator Dean Heller (R-Nevada) pressed Yellen on whether there would ever be a need for the Fed to reinstitute its bond purchasing pro- gram. Yellen was noncommittal, citing the need for flexibility but added that she hopes that the economy improves to the point where monetary policy can normalize. e Fed chair testified before the House Committee on Banking and Financial Services the next morning, an exchange that had the potential to be somewhat more contentious in light of the recent legislation considered by the Republican-controlled committee to require more transparency from the Fed and the general distrust of the Fed in some Republican circles. Chairman of the House Committee Repre- sentative Jeb Hensarling (R-Texas) signaled early on that, although the report that Yellen submitted to the House was identical to the one that she of- fered the Senate, the tone and topics of conversa- tion would be different. It was the toughest round of questioning she has faced since assuming the chairmanship of the Fed earlier this year. Hensarling opened the hearing by making a strong statement in favor of a Republican bill that calls for more transparency from the Fed in its policymaking decisions and requires the central bank to follow mathematical rules when considering when to tweak monetary policy such as interest-rate adjustments. Yellen delivered an opening statement of the same tenor as she did in the Senate, emphasiz- ing that, while the economy had improved, the economic recovery was still too fragile to deviate from current Fed policy. When pressed by Hensarling about her position on the House bill, Yellen echoed her testimony to the Senate that the Fed is as open in its process as is appropriate and that making policy decisions on the basis of a mathematical formula would be problematic. She characterized the Fed as the most transparent central bank in the world and made the case that she needs flexibility when setting Fed policy. "It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule," she told the committee. "It is utterly necessary for us to provide more mon- etary policy accommodation than those simple rules would have suggested." She balked at the assertion by Rep. Bill Huizenga (R-Michigan) that the bill allowed the Fed control because it gave it the ability to set the rules that it would follow before any congressio- nal oversight took place. She cited a lack of evidence that adopting stringent rules was a prudent way to set monetary policy. Later she would add that if the rules had been in place during the financial crisis, they would have performed "miserably" and produced "dreadful" results. "A rule is useful input, but I just won't go further than that," Yellen said In the remainder of her testimony, she struck substantially the same tone as she did in the Senate. She was noncommittal on a timeline for raising interest rates, noting that although most analysts believe that the rate hike will come in 2015, "there is no clear date," and the timing would be determined by indicators of economic improvement. AGENCY SPOTLIGHT A LOOK AT THE LATEST POLICY DEVELOPMENTS AND TOP HEADLINES

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