Janet Yellen Sets the Stage for Delivering Alpha

The Federal Reserve chair’s Senate testimony today is a harbinger for continued easy money and a lively debate at this year’s Delivering Alpha conference.

Federal Reserve Board Chair Janet Yellen Semiannual Report To Senate Banking Committee

Janet Yellen, chair of the U.S. Federal Reserve, speaks during a Senate Banking Committee hearing in Washington, D.C., U.S., on Tuesday, July 15, 2014. Yellen told lawmakers the central bank must press on with monetary stimulus as “significant slack” remains in labor markets and inflation is still below the Fed’s goal. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Janet Yellen

Andrew Harrer/Bloomberg

When former Federal Reserve chairman Ben Bernanke announced in May 2013 that the central bank would begin to taper the bond buying associated with the U.S. monetary authority’s third round of quantitative easing since the global financial crisis, equity and bond markets reacted poorly. Stocks dropped more than 4 percent in the following days, while bond yields shot upward.

The Fed had spent the better part of five years purchasing hundreds of billions of dollars of mortgage-backed and Treasury securities. Bernanke and friends at the Federal Open Market Committee lowered the federal funds rate, the interest rate at which banks loan to one another overnight, to near-zero levels — where they have stayed — in an effort to grow the economy.

Bernanke’s 2013 taper talk provided good fodder for last year’s Delivering Alpha conference at the Pierre hotel in New York. Co-hosted by Institutional Investor and CNBC, the event brings together some of the world’s savviest financial minds to discuss the key issues concerning investors.

“I thought the reaction in the markets to Bernanke’s comments was just ridiculous,” said Harvard Management Co. CEO Jane Mendillo during the Global Stage panel that morning, calling it a “reflection of short-term thinking.”

Mendillo put forth the analogy of breaking your leg, going to the doctor after some time and having him say you are now fit enough to start walking without crutches. “That would be good news,” said Mendillo, who at the end of this year will be leaving HMC, which manages Harvard’s $32.7 billion endowment.

Fellow “Global Stage” panelist David McCormick, co-president of Westport, Connecticut–based hedge fund firm Bridgewater Associates, was pleased with the way the central bank had handled the asset purchasing, being aggressive in the credit markets. “Now the Federal Reserve has essentially said, ‘We’re starting to see normal conditions; as those normal conditions hit a certain level, then we will begin to taper,’ and then beyond that, actually describing what that would look like,” he explained. McCormick said that the market overreacted to what was “a logical approach” by the Fed.

A third panel member, J.P. Morgan Asset Management CEO Mary Callahan Erdoes, espoused the importance of diversification — by geography, sector and investment structure. “What we’ve experienced over the past couple weeks was necessary,” she said, referring to investors’ reaction to the Fed. “We had to have a small adjustment in the market; it happened, and is actually providing some great opportunities for people who have been on the sidelines.”

Now a full 12 months later, all eyes are still on the central bankers. The economy has continued to work toward recovery, but a cautious Janet Yellen, the current Fed chair, noted in her testimony before the Senate Banking Committee today that “the recovery is not complete.”

While unemployment continues to shrink, falling to 6.1 percent in June, and inflation has remained under the 2 percent threshold eyed by the FOMC, the housing sector has disappointed and labor force participation is worrisome, according to Yellen. She has set the course for a possible full stop on asset purchases by October, reiterating this course of action in today’s Senate testimony. Even after its bond buying program has ended, Yellen told Congress, “the Federal Reserve’s sizable holdings of longer-term securities will help maintain accommodative financial conditions.”

Tomorrow’s fourth annual Delivering Alpha conference should shed light on what the sharpest minds in the asset management industry think of the new Fed leader’s policies, as well as on the economic prospects facing the U.S. and the world. Erdoes and Mendillo will be back for another Global Stage panel, this time joined by Maverick Capital managing partner Lee Ainslie III and London-based hedge fund firm Marshall Wace CIO and chairman Paul Marshall.

You can follow live, continuous coverage of tomorrow’s Delivering Alpha at institutionalinvestor.com tomorrow morning starting at 8:30.

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