Janet Yellen's Latest Economic Outlook

Tyler Durden's picture

Don't look for anything new here: lots of optimism, lots of Okun's law references, and a whole lot of dovishness and "this time we know what we are doing."

Some excerpts:

  • On unsustainable budgets

I’m no fan of persistently large budget deficits. I’ve warned against them throughout my career. But the real danger I see from them is not inflation. Rather, they may be harmful once the economy recovers because they are apt to boost interest rates and absorb private savings that would otherwise finance productive investments. This is potentially a serious problem in the long term that could reduce investment and lower living standards, although, in the short run, federal deficits have cushioned the blow from the financial crisis and recession. As far as inflation is concerned, there’s no evidence that big government deficits cause high inflation in advanced economies with independent central banks, such as the Fed. Japan is a case in point. Japan has run enormous fiscal deficits for many years and its government debt has risen to very high levels. Yet is has suffered from persistent deflation, not inflation.

  • On the rate outlook

So where does all this leave Federal Reserve policy? Traditionally, the main tool of Fed monetary policy is the federal funds rate, which is what banks charge each other for overnight loans. The Fed controls that rate by varying the amount of reserves it supplies to the banking system and we have pushed that rate to zero for all practical purposes. This is as low as it can go. Such accommodative policy is appropriate, in my view, because the economy is operating well below its potential and inflation is undesirably low. I believe this is not the time to be removing monetary stimulus. Consistent with that view, the FOMC has repeatedly stated that it expects low interest rates to continue for an extended period.

As we carried out our emergency lending programs and eased monetary policy in response to the recession, our balance sheet swelled from roughly $800 billion to its current level of over $2.2 trillion. Despite the reduction in our lending programs, our balance sheet remains, for want of a better word, enormous, owing to our holdings of mortgage-backed securities and agency debt. Now I just said this is not the time to be tightening monetary policy. But eventually the economy will gain enough momentum and won’t need today’s extraordinarily low interest rates. When that time comes, we will begin to tighten policy and remove monetary stimulus. And when we start doing so, we will face some technical issues due to the size of the balance sheet, as Chairman Bernanke noted in recent Congressional testimony.

These aren’t normal times. Our securities purchases have caused the quantity of reserves in the banking system to swell to something like $1 trillion—far above the pre-crisis level of around $50 billion. If we were to follow our standard approach of selling securities to raise interest rates, we would have to sell off many hundreds of billions of dollars of securities to reduce the supply of reserves enough to have any chance of pushing rates higher. The problem with doing that is that such massive sales of mortgage-related and Treasury securities could be disruptive to markets and cause mortgage interest rates and other long-term rates to shoot up when we are still in the early stages of the recovery and the financial system, although improving, is still not at full health.

  • And here is what Yellen wants to happen:

There is an alternative. To push up short-term interest rates without selling off our securities holdings, we can instead raise the interest rate that we pay on reserves held at the Fed. Because banks would have the opportunity to collect a higher reward for keeping funds on deposit at the Fed, they would demand commensurately higher returns on the overnight loans that they make in the federal funds market. So an increase in the interest rate paid on reserves would raise the fed funds rate and tighten financial conditions more generally. The ability to pay interest on the excess reserves that banks deposit with the Fed is an important new tool that Congress gave us just over a year ago. It will play a lead role when the time ultimately comes to tighten monetary policy. And, to make sure this works smoothly, we have developed some technical tools that can help keep the federal funds rate near our preferred target.5 Eventually, after economic conditions have improved and a policy tightening has begun, we may then start a gradual process of selling securities in order to help return the Fed’s balance sheet to its pre-crisis levels.

Full treatise on economic theory (but not practice) below


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
poor fella's picture

This would be an easy fix if instead of counterfeit dollars, the Fed would print yuan. Flood the world with yuan, and buy back debt with a stronger dollar. It's about their last option - after selling gold, holding tungstun, inflating currency locked up in banks and bonuses, and rates at nada.

The WalMart crowd would cheer for even cheaper crap and we could crack the back of oil prices and knock GS' and JPM's dicks in the dirt. We could even start to see "25 Cents" stores again.

Who knows how many dollars the Chinese are printing but in a war to print other countries' currency - we should kick serious ass - since we're so good at printing our own.

StevenH's picture

I agree, the financial situation after the crisis hit is not stable at all. So, it makes the government find some ways out of this situation. Economics isn't stable by its nature, to my mind. And this very fact brings uncertainty and exitement all over the world, not only in the US. Though, on the other hand, during the history there were financial crisis hits which involved the whole world. And these phenomena seem to be naturally determined.

Anonymous's picture

Heh, heh....she can pussyfoot around it, but Janet Yellen
is bearish more than dovish.

ElvisDog's picture

Help me out here. The administration chides banks for not loaning more to small business, so how is raising the interest rates on reserves held by the fed going to help that. You're going to pay the banks more to do nothing with their money. Hmmm, either we could make loans to small business that might not get paid back. Or collect guarenteed money from the Fed and hit the golf course. Fore!

Shameful's picture

Ah that's the plan.  They bitch about lending but imagine what the inflation picture looks like if they lend that money into circulation and it starts chasing goods.  They are trying to repair the bank's balance sheets pure and simple.

Anonymous's picture

No they're not. They're using that excuse to pay bankers monstrous bonuses for utter, scandalous failure.

They are institutionalizing Moral Hazard, our new flag.

glenlloyd's picture

I just wonder what plan B is?

Ripped Chunk's picture

Citigroup Warns Customers It May Refuse To Allow Withdrawals


"I'd keep playing. I don't think the hard stuff is going to come down for quite a while"

Everything is fine!


greased up deaf guy's picture

i'm fairly certain there's never a bad time for a caddyshack reference.

"nice hat. did it come with a free bowl of soup? it looks good on you though..." (eyes rolling)

deadhead's picture

Dear Janet:


You and your peers are full of shit.

Gee, you are opposed to big deficits but with your peers continue to enable such with your monetization strategy.  How about just handing out bottles of Thunderbird to alcoholics and declaring them cured?

Assetman's picture

Yeah, the Fed members appear to oppose big deficits and claim to loathe moral hazard of the banking system.

Yet in practice, they encourage both.  And they appear to sleep pretty well at night doing so.

If No-Gellin' Yellen had her way, we'd be seeing QE in perpetuity. 

deadhead's picture

No-Gellin' Yellen

I love your stuff Assetman but damnit, all I can envision now is that horrendous Dr. Scholl's commercial....painful...lol!

sodbuster's picture

"So where does all this leave Federal Reserve policy? Traditionally, the main tool of Fed monetary policy...."

Janet and the other idiots of the fed ARE the main tools- with a capital T.


Anonymous's picture

I'd like the US Govt to pay off the government's debt by sending Bush, Obama, and most every present and past congressman and senator (minus a few exceptions: Paul, Kantor, Kucinich, Leahy...) to work in China's coal mines until the debt is extinguished.

Anonymous's picture

Every prognosticator out there, both amateur and professional, can take all their scratch work and whip it into the nearest trash bin. It's all outdated rubbish if this new healthcare tax and seize bill goes through.

Anonymous's picture

So, let me see if I understand this... the government (taxpayers) is going to pay the banks interest on the reserves that the taxpayers lent to them (which were quantitatively eased into existence and which the taxpayers pay interest on back to the FED) so they will retain the money within rather than lend it back to the taxpayers, which the taxpayers did not want to lend to them to begin with... WTF?

So we the people get to pay interest, twice, for the privelage of lending money to the very institutions that caused this debacle? Thank you, sir, may I have another...

poor fella's picture

and another and another and and -

Hopefully the next benefit package to taxpayers will include a pint of Thunderbird, some aspirin, and lube.

Anonymous's picture

May I suggest that the Federal Reserve start printing food and distribute it to the hungry in America?

Anonymous's picture

I walked out my local grocery store yesterday and saw a man in a wheelchair at the edge of the parking lot. He was far enough away to barely be on the property of the store. He was near enough that you could see the sign he held asking for help.

The prices in the store are higher than last year, at least for food that I buy.

Was this man a veteran of one of America's misguided imperial wars? His legs no longer functioned. His face was aged in the way of those who live rough.

On his face I saw nothing but despair. On his face I saw the future of America.

Anonymous's picture

just came across a friend from school days that I used to make little films with. He posted this not long ago:

Dear Mr. President


JR's picture

Main Street's Latest Economic Outlook:

There are 25 million Americans out of work.

There are still over 8 million illegal aliens in the workforce.

Obama proclaimed in his State of the Union address that “jobs must be our number one focus in 2010.” 

Then he falsely claimed that his trillion-dollar stimulus bill saved two million jobs.

Now, he’s going to waste more billions upon billions of Americans’ money for the same failed program, this time calling it a “jobs” bill.

There’s a better way, says President Reagan’s former US Treasurer, Bay Buchanan: "A much simpler approach to protect jobs: cut back on immigration."

But, according to Buchanan, the White House’s website sees it differently: “The President is pleased Congress is taking steps forward on immigration reform that includes effective border security measures with a path for legalization for those who are willing to pay taxes and abide by the law…using the current tools at our disposal while we work with Congress to enact comprehensive reform.”

In other words, he wants amnesty,” says Buchanan.

Obama says he supports Rep. Louis Guiterrez’s (D-Ill.)  misnamed Comprehensive Immigration Reform for America's Security and Prosperity Act of 2009.  That, says Buchanan, “will completely gut all enforcement against illegal immigration and give a blanket amnesty to illegal aliens.  The bill has over 90 Democratic co-sponsors.”

And adds: “Every month, our government issues 75,000 new permanent work visas and 50,000 new temporary work visas.  That’s 1.5 million new foreign workers competing with Americans for jobs since Obama took office.”  Rep. Guiterrez’s amnesty bill will issue over 500,000 new visas to foreign workers next year alone.


Putting two and two together, this from The Market Ticker

Governors Brace For More Economic Turmoil (Nickbert)

States face budget holes totaling $134 billion over the next three years, according to the governors, who explained that tax collections keep declining as Medicaid costs soar. High unemployment persists. States cut 18,000 jobs in January alone and more job losses are anticipated. Because states are required to balance their budgets, shortfalls will be made up by raising taxes or fees or cutting services.


And Americans, STILL, do not dare call it treason.

SteveNYC's picture

They are a well trained lot for the most part. Don't speak out of line too much, pretty sensitive to going against the status quo and what the heads on TV think you should and should not say.

I am not even American, and I have to educate my American friends and family as to what is really going on in the world. Not good.

Zerohedge needs to go mega-viral. Perhaps we can kick-off "Zerohedge for Beginners" with a glossary etc. to help those who don't understand yet? It is really important the truth be spread, take every chance you can to do it.

Ivanovich's picture

And market goes up as expected. Just went green!

Anonymous's picture

Yellen says: "...such massive sales of mortgage-related and Treasury securities could be disruptive to markets.."
But what about buying? Didn't the same amount of buying cause same sort of market disruption in 2009? So, when rates fall and/or markets rise - it's good, but when rates rise and/or markets fall - that's a "disruption?"

Let the "free" markets be really free! (from interventionists)

SteveNYC's picture

Blue pill for you, for telling the truth....

Gimp's picture

Politicians will say and do anything for votes, citizens or illegals, does not matter. Obama is nothing new, no hope just another dope.

hooligan2009's picture

240428, you have hit the nail right on the head. This woman is seriously divorced from reality and needs to dye her hair blue with football laden antennae. If people are hungry or sick, you feed them and heal them; you cant say hear get that guy over there who I've just given a billion dollars to, to peel off a twenty and eat that or rub it better. And let's see how enamoured of the ponzi Fed scheme she is..hmm...the Fed wants to raise interest rates, by selling its 1.5 trillion mortgage book that has a spred duration of ohhh what...7 years? Return a mark to myth balance sheet so it takes a hit of ohhhh what....1% interest rate at the ten year + 1% spread widening = 2% x 7 times the 1.5 trillion? ok, so the Fed can pony up the 210 billion out of thin air with yet another ponzi device. Fed Funds cover the charge that banks charge each other? Another crock, that's LIBOR and that only works when the Fed and other Governments/central banks down own LIBOR. Grrrrrr...arghhhh...I may need to play some AC/Dc...dirty deeds down with sheep!

AnonymousMonetarist's picture

It is a reflex action to pull out the li'l chestnut below when Lady Lubrication offers a divination.

Chalk up another one for the epigram: The truths you hold to be most dear are lies told to you by liars...

By Jim Grant
Grant's Interest Rate Observer
December 2, 2005

Former Fed governor Laurence H. Meyer, in a 2003 talk at the Federal Reserve Bank of St. Louis, described a telltale exchange on the subject of how to define[price/financial] stability. The scene was Meyer's first FOMC meeting, in July 1996, and governor Janet Yellen was making the case for inflation targeting; she said she would aim for 2%. Greenspan replied that the Federal Reserve had a mandate to foster stable prices, not rising ones. To which Yellen rejoined that the Fed also had a mandate to promote full employment. To hear her tell it, a small positive rate of currency depreciation is a necessary lubricant for economic growth (not so, according to a survey of 133 economists over 50 years, produced in 2002 by Stanley Fischer et al.)

"Janet then seized the initiative", Meyer related,"asking the chairman how he would define price stability. Greenspan tried to get away with his vague definition; 'Price stability is the state in which expected changes in the general price level do not effectively alter business or household decisions.' But Yellen pressed him and asked him if he could put a number on that. Remarkably, the chairman agreed, and said he preferred zero inflation, correctly measured. Janet asked him if he could settle for 2% incorrectly measured."

Meyer finished his story;

During a go-around on the topic, only a few Committee members preferred a target of zero, and the consensus was very strong for a 2% target. The chairman ended up summarizing the discussions 'an agreement for 2%' but he cautioned members not to reveal that such a discussion took place.




Anonymous's picture

interesting paper, thanks. actually, its full of common sense and practice as well

Anonymous's picture

The Fed will not be in any position to raise interest rates at least not voluntarily anytime soon. The US economy is stuck in a liquidity trap and there is no way out except through debt liquidation.

The Fed follows the interest rates set by the debt markets. The Fed's $2.2 Trillion balance sheet is a mere footnote on the $50+ Trillion overall debt market.

Only if short term T rates go up will the Fed then be forced to raise the interest rate it pays on excess reserves. This exercise merely keeps up the illusion that the Fed not the market sets interest rates.

Grand Supercycle's picture

Just a heads up:

SP500 / DOW / COPPER counter trend rally looks over.


Tom123456's picture

Good Linux hosting option package offered by ucvhost which not only provides the best in terms of hosting packages but also believes in truly being there for the customer, 24x7. cheap vps Moreover , they offer unlimited bandwidth as well as nearly 1GB storage along with database maintenance, email facility along with storage, availability of sub domain and many other important features for a very low price. ucvhost thanks

Adam33's picture

Thanks for such an interesting and useful article. The economical situation is really hard in our country and there are many analyzes made lately. However it is really hard to find some nice ones. I think that Janet Yellen is making those economic outlooks perfectly. Of course the situation remains hard, I can't get any paycheck cash advance at all yet. Few years ago it was no a problem. However I believe that the situation will change. Obama and his government are trying to change everything that is wrong in our system. First of all health care and it's problems. Then maybe some financial details will be added and we will be able to forget about this economical recession. Let's just wait and believe that everything will be all right. Thanks one more time for such an informative article. I will be waiting for more nice ones from you in the nearest future too.