She’s Back… What will Dr. Yellen Bring?

She’s Back… What will Dr. Yellen Bring?

Button to Download the Current issue of Jumbo Rate News nowNote: Since this article was written, Janet Yellen was confirmed (84-15) and was sworn in as the first Female Treasury Secretary in U.S. history on Tuesday morning. The original story follows:

Janet Yellen has not been confirmed yet, but we have every reason to believe that President Biden’s nominee for Treasury Secretary will pass the scrutiny of Congress in short order.

Of course, we know her from her tenure as Chairman of the Federal Reserve (February 2014—February 2018). Her predecessor at the Fed, Ben Bernanke, left her with a Fed Funds rate at historic lows (between zero and 0.25%). The rate had been stuck there since December 2008. She was able to begin raising it, ever so gently, in December 2015. By the end of her term, the Fed Funds rate stood between 1.25 and 1.5%.

What’s more, the economy was on strong enough footing that Jerome Powell was able to continue tightening until the end of 2018. And there they peaked—at between 2.25 and 2.5%. Seven months later they began to drop again and after two emergency (Pandemic-related) drops last March, they are right back at that same historic low of between zero and 0.25%.

Mr. Powell has a little bit more than a year left on his 4-year term as Chairman of the Board of Governors of the Federal Reserve but his term as a member of the board runs through January 2028.

As for Dr. Yellen… She is currently on leave from the Brookings Institute as she goes through the confirmation process and will continue on leave through the duration of her term as Treasury Secretary.

She will be a Big Spender, at least in the beginning. Whereas many economists see graphs and data, Dr. Yellen sees the humanity in macro-economics. In spite of the huge debt this nation already has accumulated, she believes a $1.9 trillion follow-up coronavirus package is necessary.

"Research from other countries suggests that often, spending money to address a weak economy ends up creating a lower debt burden in the long run than failing to provide that support," she told Senators on Tuesday. (Source: The Hill)

The new administration’s aid package is consumer-focused: aiding with hunger, evictions and basic human services.

This is in addition to the stimulus checks that were already mailed out, the Paycheck Protection Program (Rounds 1 & 2), which was aimed at helping small businesses stay afloat, $12 billion in payroll support that went to the airline industry, and $25 billion in emergency rental assistance for low income households at risk of homelessness.

There are no doubt other assistance programs out there, but one sector that is not getting meaningful support is Commercial Real Estate (CRE). Presumably the aid will “trickle up”? If businesses are kept afloat then office buildings and shopping malls will keep their tenants? We don’t know if that is necessarily the case, but for the sake of the 50 banks listed on page 7 ...not to mention our economy, we hope it is.

CRE loans represent more than 35% of total loans at all 50 of the community banks listed on page 7. In addition, delinquent CRE loans are greater than 2.75% of total CRE and total delinquent loans are greater than 1.5% of the entire loan portfolio.

Most of the banks listed are well-reserved and many also have robust capital levels that will keep them in good financial shape for “some” time. Then there are others. 1-Star Noah Bank, Elkins Park, PA, for example, has a loan to deposit ratio of 92.3%. Of its loans, 83.5% are CRE and of its CRE loans, 3½% are delinquent. With a leverage ratio under 7.7% and reserves that would only cover 88% of those delinquent loans, should they have to be written off, it would have a hard time doing so. It’s already losing money.

We have a lot of faith in Dr. Yellen, but we also know this is a big job. She will need all the help she can get.

Just as an aside: Janet Yellen co-authored a book in 2001 with Alan Blinder -The Fabulous Decade: Macroeconomic Lessons from the 1990s. The U.S. economy was strong, unemployment was low and inflation was steady. The Fed Funds rate fluctuated between 3 and 8%. Everything changed after 9/11, but oh how we pine for those rates.

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