February 10, 2014

Yellen, Not Debt Ceiling Debate, to Spark Washington Fireworks

Analysts see a ‘noncrisis’ debt ceiling deal ahead, but the new Fed chief faces tough critics in the House

Fed Chairwoman Janet Yellen with President Obama and former Fed  chief Bernanke. (Photo: AP) Fed Chairwoman Janet Yellen with President Obama and former Fed chief Bernanke. (Photo: AP)

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Washington watchers looking for some sizzle to come out of upcoming events in the nation’s capital this week should look to new Federal Reserve Board Chairwoman Janet Yellen’s House testimony on Tuesday and not to a crisis-level debate on a pending debt ceiling fix.

Yellen is set to face hostile territory as she gives her first report on monetary policy Tuesday before the House Financial Services Committee; both the committee’s chairman, Rep. Jeb Hensarling, R-Texas, and Rep. Scott Garrett, R-N.J., chairman of the Capital Markets Subcommittee, are outspoken Fed critics. Yellen will face a more friendly crowd Thursday when she testifies before the Senate Banking Committee.

Both Hensarling and Garrett have committed to push for legislation that changes how the Fed operates. In December, the House Financial Services Committee announced its “Federal Reserve Centennial Oversight Project,” which Hensarling said would include “an aggressive series of hearings during 2014 that will culminate with the development of legislation to reform how the nation’s central bank operates.”

Greg Valliere of Potomac Research notes in his Monday commentary that Hensarling has “assembled a cast of naysayers who will testify after Yellen about the evils of dovish Fed policies.” Valliere says that he anticipates no policy changes to be announced by Yellen, however.

With the House GOP caucus set to meet at 5:30 p.m. Monday regarding the debt limit extension, analysts at Washington Analysis are optimistic that a bill will indeed pass prior to the Feb. 27 deadline set by the Treasury Department “with little to no impact on the financial markets.” This prediction comes despite the fact that both chambers are set to leave Washington for 10 days on Wednesday, and return on Feb. 26. “Progress needs to be made sooner rather than later, or lawmakers will have to cancel the President’s Day recess,” the analysts say.

The analysts predict the most “likely way forward will be a ‘clean’ debt limit extension passing with Democratic support. Given the looming midterm elections and Republican hopes of reclaiming the Senate, the risk, or even threat, of default is extremely low following the political fallout that stemmed from last year’s government shutdown.”

Valliere adds that Congress could indeed reach a deal before leaving Wednesday, but “House GOP leaders still haven’t decided what — if anything — to attach to the bill.” His prediction: Lawmakers “probably will seek a nine-month ‘doc fix’ and abolition of a [cost of living adjustment] provision in the 2014 budget deal that hit military personnel.”

(A doc fix is a measure to stop Medicare from cutting payments to doctors).

It’s been reported that House Speaker John Boehner wants his GOP colleagues to demand a restoration of recently cut military benefits in exchange for a one-year borrowing extension.

While “there’s no crisis brewing” in getting to a debt ceiling deal, Valliere says that “a delay until late February could become an annoyance for the markets.”

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Check out 4 Key Dates for Investors to Watch: Andy Friedman on ThinkAdvisor.

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