What a Treasury Secretary Janet Yellen would mean for markets

Former Federal Reserve Chair Janet Yellen will face an enormous challenge if she is confirmed by the Senate to serve as Treasury Secretary: pulling the U.S. out of the deepest recession since the Great Depression.

With COVID-19 cases rising and a vaccine still months away, markets appear to be focused on what a Treasury Secretary Yellen would mean for a prospective stimulus deal. On the day after the Wall Street Journal initially reported that President-elect Joe Biden picked Yellen for the job, the Dow Jones Industrial Average (^DJI) climbed to break 30,000 for the first time.

“I think that’s going to be her major preoccupation: the pandemic for the next year,” former Federal Deposit Insurance Corp. Chair Sheila Bair told Yahoo Finance on Tuesday.

Given the Treasury secretary’s important role in diplomatic matters and domestic policies, Yellen will have a hand in other critical policies, like the U.S. trade relationship with China and tax reform.

Yellen will still have to endure hearings in the Senate Finance Committee and then secure enough support in a full Senate floor vote before being seated in the job. She secured bipartisan support in previous confirmation processes.

Financial markets ranging from bank stocks to cryptocurrencies may also be closely watching her nomination process, with the Treasury heavily involved with bank regulatory policy and, as of late, digital currency developments.

Is the Yellen pick bullish for more stimulus?

There has not been a major second round of stimulus since the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March, and with cases rising, the question is if the Trump administration will move to pass something before Inauguration Day next year.

But if there is no package, Yellen’s first task would be to broker a deal on behalf of a Biden administration reportedly interested in getting a package together quickly. Yellen has said in the past that the government should be more aggressive in passing fiscal support to households and businesses.

The size of that package may hinge on the outcome of the two Senate run-off races in Georgia, which will determine if the GOP can retain control of the chamber.

Does this have any impact on Fed policy?

Yellen will also likely draw on her deep knowledge of monetary policy in working with her old colleague Jay Powell, who currently heads the Fed.

Under Trump-appointee Steven Mnuchin, the Treasury and Fed prevented a full on financial crisis by using CARES Act funds to backstop markets ranging from corporate debt to municipal bonds. But the two partners recently faced sharp disagreement over the expiry of its liquidity facilities, which may be relieved if Yellen is confirmed to head the Treasury.

“Yellen and Powell have advocated continued and robust support for the economy, which would eliminate the recent friction seen between Treasury Secretary Mnuchin and the Fed on the continuation of the Fed’s lending programs,” wrote Raymond James analyst Ed Mills on Monday.

How will she handle trade with China?

President Trump’s tit-for-tat tariffs between the U.S. and China over the course of 2019 led to a Phase One trade deal in the beginning of 2020. But questions about China’s compliance with the deal, in addition to the broad state of affairs between the two largest economies, remain risks headed into 2021.

“Where she comes down on China and the tariffs is a big open question,” Ironsides Macroeconomics Managing Partner Barry Knapp told Yahoo Finance Tuesday.

As Treasury secretary, Yellen will serve as a major liaison between the U.S. and China in trade matters. But like other Fed chairs, Yellen tended to shy away from commenting on the politically thorny issue of trade.

But she has said that the economy would be better served by taking down, not building up, tariff barriers.

“Our trade restrictions on China could affect much of Asia which is linked to China through global supply chains,” Yellen told Credit Suisse in 2018, warning that Trump’s policies could lead to a slowdown in global growth.

What about bank regulation?

The Treasury plays a large role in supervising and regulating banks. In addition to its Comptroller of the Currency arm, the Treasury has also historically driven coordination among the other two federal banking regulators (the Fed and the FDIC).

But many of the bank regulations in place today are products of the Obama-era Dodd-Frank law passed in the wake of the 2008 financial crisis. Mike Mayo, senior research analyst at Wells Fargo, said the progressive framework already in place means that Yellen will not be a catalyst for major structural overhauls.

“She’s not part of the anti-bank tribe,” Mayo told Yahoo Finance Tuesday.

Yellen could still recommend tweaks, perhaps some undoing the regulatory rollbacks made under Trump-appointee Randal Quarles, who heads the Fed’s supervisory matters. Nomura’s economics team wrote Monday that the Yellen pick would commit bank regulatory policy to the “trajectory that regulation was on before the Trump administration.”

Does she support digital currencies?

As Treasury secretary, Yellen would have weight in the government’s approach to cryptocurrencies. In 2018, Yellen said she was “not a fan” of the plethora of cryptocurrencies out there. But Yellen may soften her tone as the Fed explores the development of its own stablecoin.

Over the last few years, the Fed has been conducting experiments on digital dollars and, by extension, the use of a central bank-issued digital currency. Fed officials have made it clear that while they are experimenting with the technology, they have not committed to actually launching one.

But even without articulating a stance on cryptocurrencies, bitcoin may already be getting a bid from investors making a play on unprecedented levels of government spending. Michael Novogratz, of crypto merchant bank Galaxy Digital, said bitcoin could continue to rise in price off of the news.

“We’ve got a dove by nature and a social architect by nature,” Novogratz told Yahoo Finance on Tuesday, referring to Yellen. “So you’re going to have a macro environment bullish for gold, bullish for bitcoin, bullish for hard assets.”

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