MNI ANALYSIS: Did Yellen Just Talk Herself Out of a Job?

By Karen Mracek

     JACKSON HOLE, Wyo. (MNI) - Fed Chair Janet Yellen on Friday staunchly

defended the Federal Reserve's track record of fighting off the instability

exposed during the Great Recession and limiting risks going forward, but her

remarks put her at odds with the Trump administration's intent to deregulate the

financial industry.

     It had little immediate impact on rate expectations but may prove to be a

watershed moment for the future of U.S. monetary policy if it was a signal that

the Obama appointee did not plan to continue on as Fed chair when her term

expires in February.

     Yellen's speech at the annual economic symposium hosted by the Kansas City

Fed in Jackson Hole did not address interest rates or the Fed's balance sheet

and instead rehashed the financial crisis and financial regulators' response to

it.

     She warned "any adjustments to the regulatory framework should be modest,"

defending rules put in place by the Fed and other financial regulators including

capital requirements, resolution planning and stress testing.

     Moreover, she stressed, "I expect that the evolution of the financial

system in response to global economic forces, technology, and, yes, regulation

will result sooner or later in the all-too-familiar risks of excessive optimism,

leverage, and maturity transformation reemerging in new ways that require policy

responses."

     This relatively backward-looking review and defense of the financial crisis

served as a reminder of just how far the U.S. economy has come since the 2007.

     But if Yellen was trying to make the case for another term as Fed chair, a

better approach to the topic would have focused on upcoming financial stability

issues, particularly those currently being discussed by the policymaking Federal

Open Market Committee, and how monetary policy will address such concerns.

     At the July FOMC meeting, several members cited concerns about financial

stability, and the minutes showed a number of participants "commented that the

appropriate pace of normalization of the federal funds rate would depend on how

financial conditions evolved and on the implications of those developments for

the pace of economic activity."

     Financial stability is not officially part of the Fed's dual mandate for

price stability and maximum employment, but it is never far from the discussion

about policy, and Yellen missed a chance to frame the discussion going forward.

     Her speech could be a sign she is looking past a reappointment next year --

defending the current record instead of giving the audience and markets an idea

of how financial stability issues will impact the path of rate normalization.

     Or she was sending a signal to President Donald Trump she's not going to be

a pushover when it comes to deregulation if she were to be reappointed.

     Trump upped the chances Yellen could stay on as Fed chair when her term

expires next year in a Wall Street Journal interview last month. He signaled his

respect for her while also mentioning he is considering his top economic advisor

Gary Cohn and others to be in charge of the U.S. central bank.

     Trump said Yellen is doing a good job and said he has "a lot of respect for

her." But while Trump likes her slow, gradual approach to rate increases, he is

not likely to appreciate her firm stance on financial regulation.

     As for Yellen herself, she most recently addressed her future in

Congressional testimony in July. "What I previously said is that I absolutely

intend to serve out my term," Yellen said when asked about it.

     "I'm very focused on trying to achieve our congressionally mandated

objectives and I really haven't had to give further thought at this point to

this question," she said.

     She was also pointed asked if this was going to be her last time in front

of the committee presenting the monetary policy report. "It may well be," she

said.

     When pressed on the issue by another representative, Yellen said, "It's

something that hasn't been an issue so far," though she added it is "certainly

something" she would discuss with Trump if asked.

     Given her remarks defending financial regulation in her Jackson Hole

speech, they would have a lot to talk about.

--MNI Washington Bureau;tel: +1 202 371-2121; email: karen.mracek@marketnews.com

[TOPICS: MMUFE$,M$U$$$,MX$$$$]