Wall St rises modestly on Yellen speech

Gladys Abbott
August 31, 2017

Ms Yellen warned that "sooner or later" markets would again experience "excessive optimism", leveraging and other threats that could require new regulatory responses.

"Rather than use this speech today, as I would have hoped, to lay out her thinking on the plans for the Fed to begin to shrink the balance sheet or discussing inflation, she is sort of putting a stake in the ground here in terms of this regulation issue, which is the one sort of sticking point between her and Trump right now", said Phil Orlando, chief equity market strategist, at Federated Investors in NY.

But unlike the market's solid rally after Yellen's bland remarks, Treasurys didn't react after Draghi steered away from any mention of the future trajectory of ECB monetary policy (https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170825.en.html) in his speech, perhaps to avoid giving any signs that could be read as a hawkish prelude to a tapering of its bond purchases.

In his speech at a symposium of central bankers at Jackson Hole, Draghi held back from talking down the currency, sending the euro to a 2-1/2-year high against the dollar. Supervision of large banks has become more centralised, and they are stress-tested every year to make them more resilient.

Her comments will be seen as a warning to the White House not to water down regulations put in place after the crisis.

Trump has said he is considering Yellen and his top economic adviser, Gary Cohn, for the post.

Trump hasn't notched any major policy wins in his time in the White House, but the stock market is up 7.4% since his January 20 inauguration.

In his speech, Draghi did not address the financial health of the eurozone, which includes the 19 nations that share the euro currency.

Britain's shock vote to exit the European Union and Donald Trump's nationalist presidential campaign opposing open borders have sent waves of unease through quarters that normally promote trade liberalisation, such as the International Monetary Fund and World Bank.

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"She's making the statement: Don't forget what caused the financial crisis, these safeguards should not be dismantled", said Mark Williams, a professor at Boston University and a former Federal Reserve official.

Trump has said that the sweeping regulations enacted in the wake of the 2008 financial crisis have been a "disaster", making it hard for consumers and businesses to get access to credit and strangling economic growth.

Ms. Yellen said it's worth reviewing regulations - for example to help smaller banks lend to small businesses - but any adjustments should be modest. She also suggested that the so-called Volcker Rule, which limits the ability of banks to trade their own investments, might need to be modified.

She insisted there was no evidence that regulatory changes had either acted as a drag on economic growth or hindered the ability of banks to lend.

Yellen said changes since the global financial crisis, which began a decade ago, have significantly improved the resilience of the financial system.

Why? It's no coincidence that the worst expansion in modern history came after a Democratic Congress in 2010 threw a wet blanket over the economy by the name of Dodd-Frank.

Finally, loyalty matters to President Trump. He has, for example, nominated Randal Quarles to the key post of Fed vice chairman for bank supervision.

The Republican-controlled House voted along party lines in June to repeal numerous Dodd-Frank regulations.

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