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Yellen Staying the Course, Institutional Investors Cheer

Credit: Library of Congress

Credit: Library of Congress

Janet Yellen, the newly inaugurated chair of the Federal Reserve, gave her first testimony before Congress, delivering the Fed’s semiannual Monetary Policy Report to Congress, also known as the Humphrey Hawkins testimony. Yellen, who became chairman earlier this month, largely echoed the sentiment of her predecessor, Ben Bernanke, defending the use of unconventional policy tools, such as forward guidance, and planning to maintain very low interest rates. Institutional investors around the globe, including sovereign wealth funds and pension CIOs listened intently on her words.

“I expect a great deal of continuity in the FOMC’s approach to monetary policy,” Yellen said in her prepared remarks. “I served on the Federal Open Market Committee as we formulated our current policy strategy and I strongly support that strategy.”

Barring a “notable change” in economic data, Yellen said the Fed will continue tapering its monthly purchase of Treasuries and mortgage-backed securities. The process, known as quantitative easing (QE) implemented by the FOMC, was intended to lower long-term interest rates to stimulate spending in the domestic economy. Under Chairman Bernanke, the Fed scaled back monthly asset purchases to US$ 65 billion.

Although signs of slow job growth will not shake the Fed’s resolve to taper asset purchases, Yellen said the Fed will keep short-term interests rates at zero “well past” the time unemployment reaches 6.5%, which was the benchmark the Fed set for raising rates in 2012, when unemployment was at 8.1%, during its last round of stimulus.

This is approximately a 133% increase in the debt limit from May 2003.

Staying the Course

Yellen said she strongly supports the Fed’s dual mandate to promote employment and control inflation. Unemployment has dropped to 6.6%, but Yellen told the U.S. House of Representatives’ Financial Services Committee that the labor market recovery was “far from complete.” The Bureau of Labor Statistics reported only 113,000 new nonfarm positions added in January and 75,000 in December. In addition, the labor force participation rate plunged over the years – testing late 1970s levels.

Doing the Popular Thing

As many of her predecessors at the Fed have done, Yellen warned that the United States is on an unsustainable fiscal budget path. Rising deficits will crowd out private investment leading to higher interest rates and slower growth, she said. This is on the backstop of Congress agreeing to approve the U.S. debt limit through March 2015. The new U.S. debt ceiling is US$ 17.2 trillion which served as blow to pro-austerity politicians. Near the end of May 2003, Congress approved at debt limit of US$ 7.384 trillion. This is approximately a 133% increase in the debt limit from May 2003.

When pressed by Rep. Michele Bachmann (R-Minn.) to respond to former Congressman Ron Paul’s “Audit the Fed” proposal, Yellen said she strongly objected to “interfering with the independence of monetary policy, by bringing political pressures to bear on the committee’s judgment.” She noted that the Fed is already audited extensively and said she opposed the idea of Washington second guessing central bank decisions.

Institutional Investors Remain Skeptical as Bitcoin Continues to Rise

Bitcoin has continued to rally over the past month – hitting a record US$ 8,224 in the early hours of November 20 – and institutional investors are beginning to take notice of the cryptocurrency’s increasing popularity. With a market value of more than US$ 130 billion, the digital currency has seen unprecedented growth of over 700% over the past year. But Bitcoin’s rise has also been marked by a number of volatile slumps, leaving institutional investors divided over its durability as a long-term store of value and wondering whether to get in on the action. Despite these headwinds, more than 100 hedge funds have been formed to trade in digital currencies.

Split Consensus on Wall Street

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3 Reasons Why Other Sovereign Funds Will Not Dump Oil Stocks

Norges Bank informed the country’s ministry of finance to recommend the wealth fund to remove oil and gas listed equities from the fund’s benchmark index. The central bank came to the conclusion that Norway’s Government Pension Fund Global (GPFG) would be less vulnerable to a permanent drop in oil prices if the wealth fund was not invested in oil and gas listed equities. For some academics there are arguments that wealth funds should diversify away from their sources of wealth. Contradictory studies have demonstrated that wealth funds should support industries that enhance the country’s sources of wealth. For example, earlier on, Norway’s fossil fuel wealth was buoyed by increased capital investment to the oil sector to increase output, a pre-cursor to the wealth fund’s explosive growth.

1. Stock Performance
For some sovereign investors, investments in master limited partnership in oil and gas have been strong driver of returns, or even in smaller fossil fuel listed companies. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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GIC Financially Backs Innovation Precinct Project in Melbourne

Singapore’s GIC Private Limited acquired a majority interest in a joint project located in Melbourne, Australia. The joint project is between Sydney-based Lendlease, Australia-based Urbanest and GIC. In 2014, the project was labeled Carlton Connect Initiative with the goal of being an innovation hub.

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