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US: Janet Yellen Wins Senate Approval To Become US Treasury Secretary
Tuesday, 26 January 2021 . Former US Federal Reserve Chairwoman Janet Yellen cleared her final hurdle on Monday (25 Jan) as she gained strong bipartisan Senate confirmation to become the US Secretary of the Treasury. The affirmative 84-15 vote made Yellen the first female to lead the department, a feat she matched as the Chair of the Federal Reserve (which the Senate voted 56-26 in Alvin Liew Senior Economist her favour to lead the Fed Reserve on 6 Jan 2014). [email protected] . Yellen has laid out priorities during her Senate nomination hearing – the most significant and Peter Chia Senior FX Strategist pressing of which is her support for President Biden’s US$1.9 trillion stimulus package. Other [email protected] priorities include an immediate review of US sanctions policy and financing Biden’s ambitious plans, Her wealth of monetary policy experience is expected to bring back coherent US dollar
policy and to have a strong working relationship with the Fed Reserve. But as of now, she has not committed to a “strong dollar” either and instead, affirmed the US’ commitment to Peter Chia market-determined dollar value. Senior FX Strategist [email protected] . With Yellen confirmed as the new US Treasury Secretary, the Treasury Department also announced several senior members of Yellen’s team, of whom many were veterans from the Obama administration. They include:
1) Natalie Earnest as the counselor to the secretary for strategic communications 2) Mark Mazur as deputy assistant secretary for tax policy in Treasury’s Office of Legislative Affairs 3) Aruna Kalyanam as deputy assistant secretary for tax and budget in Treasury’s Office of Legislative Affair
Yellen’s Policy Priorities And Views – Dealing With Pandemic Impact, Fiscal Trajectory And China
. At the Senate Finance committee’s confirmation hearing for Yellen’s nomination as the next US Treasury Secretary last week (19 Jan), Yellen had outlined several of her priorities and her views relating to issues on the economic well-being of the US economy, the US fiscal outlook and debt sustainability, tax changes and China. (Please see Yellen’s testimony and document posted on the committee’s website in response to the various questions posed to her by the finance committee.)
. Some of the key points made during the 19 Jan 2021 hearing:
1. Supporting Biden’s US$1.9 trillion stimulus plan – Yellen urged US lawmakers to “act big” on the next coronavirus relief package, rationalising the benefits will outweigh the costs of a higher debt burden. Without more aid, the risk is that the US will have to worry about economic scarring, and long-term economic problems. She also strongly supported Biden’s US$2 trillion Infrastructure spending, green energy projects and investing in research and development and worker training - to improve the U.S. economy’s competitiveness.
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2. Financing Biden’s various initiatives – Yellen said taxes on corporations and the wealthy will eventually need to rise to help finance Biden’s various plans but that would only come after reining in the pandemic. Yellen believed that parts of 2017 tax cuts for wealthy Americans and large companies should be repealed but she also noted that President Biden does not support complete repeal, and what he wants achieve is to stop incentives to move company operations offshore. (Potentially, she will try to raise corporate tax to 28% from the current 21%, and increase taxes on Americans making more than US$400,000 a year). One of the eye-catching points was her proposal that the Treasury would consider the possibility of taxing unrealized capital gains - through a “mark-to-market” mechanism - as well as other approaches to boost revenues. And when asked about the idea of a UST 50-year bond, Yellen said would be pleased to look at issue, and noted possible market for bonds of that maturity.
3. Long-term fiscal trajectory is concern but points to low interest rates as a mitigating factor – Yellen said that the US long-term fiscal trajectory is a cause for concern and it is something that the US eventually need to attend to but she also highlighted it is “important to remember we are in a very low interest rate environment. Low rates are signs of structural shifts likely to be with us for a long time.”
4. To begin an immediate review of US sanctions policy – Yellen pledged she would conduct an immediate review of US financial sanctions policy administered by the US Treasury to ensure that they were used “strategically and appropriately.” She sees the best way to address unfair trade practices is to work with allies and the US should focus directly on abuses such as theft of intellectual property, unfair subsidies forced technology transfer.
5. China as US’ top strategic competitor – Yellen regards China as most important strategic competitor to US and urged that the US must make investments to enable it to compete with China. In response to questions to Treasury’s approach to China, Yellen said US has “to play a better defense, which must include holding China accountable for its unfair and illegal practices and making sure that American technologies are not facilitating China’s military buildup, human rights abuses, or other malign activities.”
Yellen’s US Dollar View – Letting Markets Set The Value Of The US Dollar
. During her Senate hearing, when asked about her view about the US dollar, Yellen affirmed the US’ commitment to market-determined dollar value and that “the United States does not seek a weaker currency to gain competitive advantage and we oppose attempts by other countries to do so.”
. At the same time, Yellen has not committed to a “strong dollar” either, as some of her predecessors such as Laurence Summers and Robert Rubin did.
. This perceived neutral and passive stance from the Treasury means the state of the US economy and Fed would remain to be key drivers of the USD. Our expectations of a global reflation trade this year is a key negative for the USD as economic recovery in the rest-of- the-world outpaced that of the US. The Fed is also adopting a cautious stance when it comes to normalizing its monetary policy. Fed chair Jerome Powell, on 14-Jan, said “now is not the time to be talking about exit” when it comes to the bond-buying programme. His affirming comments allayed concerns of a repeat of “Taper Tantrum” and also put a lid to the nascent recovery in the USD at the start of the year.
. Overall, we maintain our view of a modestly weaker USD this year. This translates to EUR/USD at 1.24, USD/CNY at 6.35 and USD/SGD at 1.30 respectively by end-3Q21.
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Will Yellen Embrace A Weaker Or Stronger USD As US Treasury Secretary?
Source: Various News Agencies, UOB Global Economics & Market Research
Yellen’s comments as Federal Reserve Official: Sep 2004: “We have a huge current account deficit, and that is a drain on demand in our economy. A lower dollar ultimately should feed through into more demand”
Dec 2007: “The drop in the dollar from 2002 will help to improve our gaping trade deficit and thereby offset some of the otherwise contractionary effects of the tighter credit conditions”
Dec 2015: “The dollar has strengthened quite a lot over the last year and a half … the strength of the dollar is one factor that means that monetary policy for the U.S. is more likely to follow a gradual path”
Jun 2016: “A stronger dollar does have a depressing effect. It creates channels through which domestic demand is depressed … somewhat of a drag on U.S. growth”
Yellen’s comments as US Treasury Secretary-designate: Jan 2021: “Value of dollar and other currencies should be determined by market…targeting of exchange rates for commercial advantage is unacceptable.” (At the same time, during her Senate hearing, she didn’t say she backs a “strong” dollar -- the policy that the U.S. had starting in the mid-1990s.)
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