Yellen: believe that the market determines the exchange rate

On Tuesday, January 19, former Federal Reserve Chair Yellen appeared at her Senate nomination hearing to serve as U.S. Treasury Secretary.

The market is highly concerned about Yellen’s views on the level of U.S. debt and the U.S. dollar. This may have an impact on U.S. bond yields, and the dollar’s movement, considering the Biden administration’s series of fiscal stimulus plans to fight the epidemic that took office on January 20.

U.S. Congress Senate Financial Services Committee Chairman-designate Ron Wyden said he hopes the Senate will vote on Thursday (Jan. 21) on the confirmation of Yellen’s nomination for Treasury secretary.

Yellen read from a prepared speech, reiterated that the current consensus is that if the lack of further action, the recession will be more painful and will cause longer lasting scars to the U.S. economy, and the wisest thing is to take “massive action”.

The Financial Times previously interpreted that Yellen will temporarily “ignore” the U.S. debt problem and focus on solving the economic problems affected by the epidemic. She will also reiterate the commitment of the market to determine the value of the dollar and ensure that the United States will not deliberately seek to devalue the dollar.

In the much-anticipated question-and-answer session, Yellen’s statement was largely in line with market expectations.

On the issue of the dollar exchange rate, Yellen said she believes in the exchange rate determined by the market and that the U.S. will not seek a weak currency to gain economic advantage, which is unacceptable and opposes attempts by other countries to do so.

In terms of issuing debt to stimulate the economy, Yellen acknowledged the need to keep the federal budget on a sustainable path, the long-term path of fiscal deficits is a cause for concern and must be addressed, but for the time being, the provision of bailouts appears particularly important, the low interest rate environment is a reason to implement large-scale fiscal stimulus, if the failure to control the epidemic and invest for long-term growth, the U.S. economy and debt situation will be worse.

I would very happily consider issuing long-term bonds, including a 50-year U.S. Treasury bond, she said. She also said she believes the Fed’s low interest rate policy could last a long time, but did not rule out a possible rate hike.

On the issue of tax reform, Yellen said the Biden administration will not seek to roll back the 2017 Trump tax cuts “now” while the economy is still in distress, which is consistent with market expectations; and the Biden administration does not want to repeal the entire 2017 tax reform law, but to modify the provisions that benefit large companies and the wealthy, “I do think that, to some extent, there should be a capital gains tax,” after a heavyweight Democratic senator called for an annual capital gains tax, rather than a tax on the sale of assets.

Yellen wants to work with other countries to prevent bottom-by-bottom competition in corporate tax rates (race to the bottom), after Biden suggested raising the U.S. corporate tax to 28 percent, after the 2017 tax reform had lowered it from 35 percent to 21 percent. She also wants to work with the OECD, the Organization for Economic Cooperation and Development, to stop foreign attempts to unfairly tax U.S. companies and to end incentives that encourage U.S. companies to move overseas.

In the area of new energy investments, Yellen called climate change the most critical issue and existential threat facing the world and the U.S. The Biden administration’s infrastructure plan would involve investments in renewable energy and clean technology, promoting the use of electric vehicles, and creating good jobs. She said Biden wants to create a “thriving” electric vehicle market and supports reshaping incentives for electric vehicles.

In the job market, Yellen said special attention to the labor market, “the core concern” is the needs of U.S. workers; raise the minimum wage to $ 15 / hour to help reduce the size of the unemployed population, will provide various levels of relief for low-income people and minorities; state and local budget cuts may hinder economic recovery, the need for federal assistance; the Federal Reserve’s “Main Street lending program” has not succeeded in making small and medium-sized enterprises access to credit, the new administration will be more effective in solving the problem.

Yellen said I will focus on introducing a second round of bailouts to “rebuild a better America,” which will then focus on infrastructure, research and development, training, and workforce development. Earlier, Biden proposed a $350 billion bailout for state and local governments, as well as $170 billion in school aid.

In addition, Yellen said that a (working) group center related to climate change issues will be established at the U.S. Treasury; cryptographic digital currencies are indeed a concern from an anti-terrorism and anti-criminality perspective; and some hedge fund firms have dangerous levels of leverage.

The dollar index narrowed its intraday loss from 0.3% to 0.1% at one point before Yellen’s speech, and re-expanded to 0.3% after the Q&A session opened.

Two-year U.S. bond yields turned lower intraday, and the 10-year U.S. bond yield once turned lower, forcing 1.09% down, before Yellen’s speech had intraday upside of 1.1 basis points to trade at 1.11%.

After Yellen’s evaluation of the 50-year U.S. bond, the long-end U.S. bond yields rose briefly. 10-year U.S. bond yields rose more than 1 basis point, hitting a high of 1.1074%, and 30-year U.S. bond yields rose nearly 2 basis points, returning to above 1.86%.

The three major U.S. stock indices first narrowed their collective gains, the Nasdaq rose to less than 100 points, the question and answer session when the U.S. stock gains re-expanded, the Dow rose by more than 110 points to expand to up more than 140 points, the Nasdaq re-up more than 130 points, the S&P 500 index rose more than 0.6%.

Analysis pointed out that the entire hearing basically did not deviate from market expectations. Yellen emphasized the low interest rate environment as a reason not to worry about larger fiscal stimulus spending at this time, and while debt to GDP levels are important, interest payments to GDP levels should also be considered, with the latter not yet a cause for concern. Most Republican senators do not welcome Biden’s aid package and are also opposed to tax increases.

Yellen’s hearing speech, which was circulated Monday evening, revealed that she will say in the Senate that if Congress does not approve more aid, the U.S. could face a longer, more painful recession and the danger of a prolonged economic deterioration in the future.

Yellen will urge Congress to carry out “massive action” in a low interest rate environment to support the economic recovery. She said that the U.S. economy is suffering from growing inequality even before the outbreak of the pandemic. It is reported that Yellen plans to carry out a stimulus package, including an increase in the minimum wage, a significant increase in Family vacations, etc.. These plans have already drawn opposition from the Republican Party.

Last week, President-elect Joe Biden unveiled a $1.9 trillion bailout plan to combat the epidemic, providing a new round of direct stimulus payments, expanded and enhanced unemployment benefits, funding for schools and first responders, and grants for vaccination programs across the United States. Biden’s package also includes long-standing Democratic priorities, such as raising the federal minimum wage to $15 an hour and expanding paid leave for “hard workers.