Janet Yellen

Meet your latest group of Fed doves. The pass fail criterion was: ZIRP __ Yes __ No.

Janet Yellen earlier said: "Obviously, with the unemployment rate so high, we are very far from that full employment level. In fact, the output gap was around negative 6 percent in the fourth quarter of 2009, based on estimates from the nonpartisan Congressional Budget Office, or CBO. That’s an enormous number and it means the U.S. economy was producing 6 percent fewer goods and services than it could have had we been at full employment. In view of my forecast of moderate growth and high unemployment, I don’t expect the output gap to completely disappear until sometime in 2013." This means no Fed hike for the next three years. Those calls on Dow 100,000,000 looking really good here.

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."

Janet Yellen, who in mid-November completed a "fact-finding" trip to Hong King and China, provides some insightful observations into the closely tied monetary fates of China, Hong Kong and the US, as well as China's Catch 22 paradox of overcapacity. As Yellen points out, US monetary policy is a critical factor for both Hong Kong and the mainland "both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery." In essence, and in confirmation with Zero Hedge's "vassal theory" of the Sino-US relationship, China has a "considerable interest" in the Fed's exit strategy. Yellen demonstrates that while China is forced to look to growing its own internal economy now that the export-led, current account surplus model is over, the transition will require yet more stimulus, thereby further inflaming the asset bubble, spurred by the massive overcapacity already in place in the country, and further pushing the country into a monetary-fiscal zone of disequilibrium. This would be exacerbated by any move to strengthen the Yuan, which is what has to happen for the US to keep inflating its troubles, yet won't happen so long as China continues being in denial about its bubble conditions, thanks to a phenomenal precedent set by none other than the Federal Reserve itself. Yellen won't go so far as admitting it, but all the ingredients for a massive Chinese (and thus, U.S.) crash are now in place.

This raises the broader—and very contentious—issue of whether monetary policy should seek to lean against potentially dangerous swings in asset prices. The answer is far from clear, because the use of monetary policy for these ends necessarily compromises the attainment of other macroeconomic goals. Because such use of monetary policy is costly, high priority should be assigned to developing regulatory tools to address systemic risk. Even so, the crisis of the past two years has prompted many of us to reexamine the widely held view that monetary policy should respond to asset prices only to the extent that they influence the anticipated trajectories of inflation and unemployment. Further research into the connections among monetary policy, the banking and financial sectors, and systemic risk is needed to help answer this question." - Janet Yellen

Ms. Yellen: we respectfully would like to say that you could not be more wrong. In essence your question of whether the Fed should inflate asset bubbles, defines the Fed's completely perverted and flawed agenda better than any other tongue-in-cheek elaboration for the continued worthless existence of your money printing syndicate.

"The economy’s return to growth after a year and a half of recession marks a major turn and it looks like more than a flash in the pan. It seems to me that the economy has entered a sustained period of expansion. We’ve seen meaningful upturns in areas as diverse as housing, consumer spending, industrial production, and foreign trade. And, a number of factors bode well for the future, including a better functioning financial system, low mortgage interest rates, a resurgent stock market, a stabilization of house prices, and stronger growth abroad." - Janet Yellen

"With slack likely to persist for years, it seems likely that core inflation will move even lower, departing yet farther from our price stability objective. From a monetary policy point of view, the landscape will continue to present challenges. We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation. With our policy rate already as low as it can go, it’s no wonder that the FOMC’s last statement indicated that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” I can assure you that we will be ready, willing, and able to tighten policy when it’s necessary to maintain price stability. But, until that time comes, we need to defend our price stability goal on the low side and promote full employment. Thank you very much." - Millions of unemployed Americans thank you Janet

Grandma Janet sounds like an insane and/or senile bureaucrat who does not want to admit that she was one of the select cabal of monetary druids whose mistakes essentially destroyed the financial world a year ago... and their reaction to this destruction has made sure that the US economic system is now promptly heading either toward hyperdeflation or hyperinflation (likely both).

In summation, credit needs to flow or the beast will starve:

"Although my message is that you should plan for the worst and exercise caution, I want to stress that it is also critical that you continue to make loans to creditworthy borrowers. The profits that quality loans generate will serve you well as you safeguard capital. They are the core earning assets that will power bank profitability as we head out of this recession. And, of course, the credit provided by prudent, well-functioning depository institutions will play an important role in supporting the broader economic recovery that now seems to be on the horizon.