Janet Yellen is likely to step into the role as Treasury Secretary following her testimony in Washington yesterday. A confirmation vote in the Senate is quite possible before the week is through. Yellen’s testimony before the US Senate’s Finance Committee on Tuesday went well.
Yellen’s approval is expected and is likely to receive bipartisan support. Last week Joe Biden proposed a potential stimulus package of nearly $1.9 trillion and he certainly used Janet Yellen as a proponent yesterday. Yellen was forthright, saying a big act of stimulus must be implemented near term to fight the current economic downturn the US faces due to coronavirus.
Stimulus Backed by Historic Low Interest Rates
Yellen said massive stimulus spending is needed by the US government and suggested one way to pay for it and expand the US economy is to issue more US bonds while taking advantage of historically low interest rates. When asked about the prospect of a 50-year bond, Yellen said she would take it into consideration, even though financial institutions have said openly they are not interested in the past.
Yellen said she believed the benefits of a big act of Fed stimulus will outweigh the risks of costs in the long run, to stabilize the US economy inclusively. Talk of even more stimulus down the road is a talking point from the Biden administration and it appears Yellen will give additional spending her backing.
The amount of spending by the US is astronomical and isn't about to stop. The USD has been weak and the question is if it will continue to get weaker as the US piles more money into stimulus packages. Essentially, the US will have to pay for this stimulus by selling more bonds, hoping the economy stabilizes, then expands, and that the US government can collect more taxes too.
Because Janet Yellen’s policy background is known, questions from the Senate and her remarks were largely focused on the US economy. Yellen’s past as the former Chair of the Federal Reserve means she will be listened to carefully by policymakers and her ideas will also be taken into consideration by the current Federal Reserve leadership who hold her in high regard. Yellen is a respected figure. Yellen was the first woman to serve as Federal Reserve Chair and will be the first woman to head the Treasury.
Fed Policy Effect on the USD and Stock Markets
Some financial analysts remain worried about the current level of spending by the US government and the potential for even greater sums of stimulus to create large fluctuations in asset valuations. The perceived notion of kicking problems down the road is a legitimate concern and creates additional skeptics in the financial world.
Not only will the USD be affected by more US stimulus, but traders can expect US stock markets to also be affected by stimulus. Corporate investors are bound to see further spending programs as beneficial for equities short term because stimulus is expected to spur on the economy.
The outlook for the USD as more stimulus is approved likely means it will create a weaker stance against the EUR, GBP and JPY. The weaker US dollar is not helping the world economy. Yes, US exports to other locales are cheaper, but foreign governments’ trade and production costs are affected negatively.
The IMF is bound to speak up about the USD if it becomes too weak, but there is further room for the USD to fall when taking into consideration that the past values the USD has seen against currencies such as the EUR, GBP, and the JPY.
One way for the USD to strengthen against emerging market currencies is for the foreign central banks to buy the USD against their own currencies and to even potentially offer USD-backed bonds by their own governments. While this isn’t a path many foreign governments like, it is a possible way to counter concerns regarding their own domestic currencies from becoming too strong.
Emerging market central banks, like Israel’s, face a difficult balancing act. Israel’s Central Bank has promised to buy 30 billion worth of USD over the next year to try to weaken the NIS - the pronouncement helped for one day. The NIS lost value against the USD quickly but soon stabilized, and did not change the playing field for long. Early this week the NIS has gotten stronger.
Long-Term US Stimulus and Existing Sentiment
After Yellen’s testimony before the Senate yesterday and saying a big act of stimulus was needed, it is important to note that Forex markets began to see a USD selloff. This is not a coincidence and is a reflection of existing sentiment. Dovish Federal Reserve policy coupled with the notion that the Treasury is going to create more money supply is a reason for the weaker USD.
If more stimulus packages are enacted long term because the coronavirus continues to rear its ugly head through the summer of 2021, President Biden, Janet Yellen and the Treasury should be expected to remain proactive and have loud voices.