Submitted by Dominique Dassault via GlobalSlant.com [13],
Yellen Is Loathe To Change Easy Money Policy
With her diminutive stature, dutch-boy haircut and puffy facial features Janet Yellen certainly does not look like a leader…more like a Brooklyn grandmother eager to tell you her special recipe for chocolate chip cookies. In this case, unfortunately, her appearance does not deceive.
You might ask What Are The Traits of a Leader? Naturally, there are many but one trait, I can assure you, that does not define a leader = COWARDICE…and that dubious characteristic seems to describe Yellen’s recent tenure at The Federal Reserve.
It is a strong statement. I am aware. But, sadly, it is an assertion that is not too difficult to support.
Definition of Coward:
a person who lacks courage in facing danger, difficulty, opposition, pain, etc.
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First of all, Yellen has demonstrated no thought leadership at The Fed. She is simply “preaching the same gospel” as her nerdy predecessor Ben Bernanke. I suppose that since her “hero” [her words] decided that debt monetization and interest rate suppression were a sound strategy for the economy then she might as well continue with the same approach…despite its limitations. This copycat approach seems to suit her well and, of course, that is unfortunate. Her lack of rational action, with respect to interest rate policy, reminds me of those that just do not have the courage to think for themselves…always wanting to piggyback on other people’s ideas rather than to devise thoughts of their own. Anyway it seems change is not in Yellen’s DNA [as it would require original thought] while she is forcefully fighting a logical change of course on interest rate policy. Maybe because any type of change is painful [see definition of coward above] even if the change itself is relatively minor [as in a 25-75 basis point increase in interest rates]?
Second of all, the cautious nature of Yellen [to not even legitimately contemplate a rate hike] is stunning. Sure, she talks a “good game” with respect to adjusting existing policy but is always deferring to the future and outlining a long list of conditions/caveats. Her internal monologue may go something like this…“perhaps we’ll make an adjustment to The Fed’s interest rate policy…perhaps not. I just need to think about it a little more. I am not sure.” And her procrastinating nature simply perpetuates into a frozen state of mind. As if a 25-75 basis point ramp in the fed funds rate will derail this moderate recovery. If anything, her timid approach speaks to the fragility of the economic recovery…an implied indictment of her Fed’s strategy. If, by chance, Yellen did raise rates she would surely face some opposition [see definition of coward above] likely from within her own “stacked” Fed…and therefore, to avoid being opposed, is delaying the inevitable for as long as she can…which brings up another intriguing point to ponder.
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If The Fed’s strategy to stimulate the economy is so effective [by her account] then why has the economy not reached “escape velocity” after six years of turbo charged stimulation? And then, why does the current interest rate environment not reflect that improvement? It is important to note that interest rates have not been pushed up for more than a decade.
Where the economy moves from here is a true unknown but that could be said at any point in time as economic forecasting is an art…not a science. However Yellen frequently cites continued uncertainty as a rationalization of current policy…but that is a lazy minded thought especially for a supposed expert in macro-economics and does not address the massive improvement in the U.S. economy since the lows of 2009.
How massive? The economic improvements in the United States are overwhelming and have been articulated, ad nauseam, by many i.e. jobless claims, unemployment rate, new car sales, home prices, etc. Some indicators have even exceeded the levels of the pre-2000 technology bubble i.e. jobless claims. And despite all the “gloom and doom” [i.e. comparisons to the Great Depression of the 1930’s] espoused by Yellen and her colleagues it is important to note that Real GDP is almost 10% HIGHER than the pre-recession peak of 2008. The economy is definitely not great but it really is not that dire either. Certainly nowhere remotely close to the economic nadir in 2009.
How bizarre and inexplicable is it then that U.S. interest rate policy is still exactly the same as it was when initiated by Bernanke in 2008/9? The incongruity, vis-a-vis U.S. economic performance, is so lopsided it is almost comical. According to Bernanke interest rate suppression and debt monetization were necessary because the economy had been delivered a “knee-buckling” blow from the real estate crash [of which, ironically, both Bernanke and Yellen presided over as senior level employees at The Fed] and these non-conventional measures, it was argued, were the shock therapy the economy needed to get “back on track”. The economic data at that time, was bleak…and getting bleaker. So, the shock therapy was applied without much push back. Fast forward six years and the economy is well beyond its once debilitating shock and is generally “back on track”…yet the policies of shock therapy are still being applied. There really is no legitimate economic reason to explain it. There must be other motivations.
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Thirdly, the primary motivation for Yellen’s inaction on rate policy appears to be that a reversal of The Fed’s strategy will be too painful [see definition of coward above] for the economy, and more importantly to Yellen, financial markets to endure [which also strongly argues against the strategy of easy money if you cannot normalize the policy without a significant shock to the economy/financial markets]. The rapid 13 month plunge in the federal funds rate [effectively ending at zero in December 2008] from 4.66% in October 2007 and continued for another 6 1/2 years is just too great a conundrum for The Fed to reverse without seriously disrupting the market’s dependency on this low interest rate drug. How ridiculous is that? A steep 13 month decline in the federal funds rate of 466 basis points ending at zero…and then 6+ years residing at zero…and Yellen is vacillating over a puny increase of just 25 basis points. This ought not to be as difficult [see definition of coward above] as she is portraying it to be.
So really…there is no exit strategy…there is only a continuation strategy…and The Fed’s cronies have always known this. Yellen can argue that The Fed is no longer adding to its $4.5T balance sheet but still…the balance sheet currently resides at a historically massive level…hardly a relaxation of stimulative policy. She is simply paralyzed with fear that the markets will violently react to a tightening of policy. An unsuccessful attempt to slowly “forward guide” the financial markets out of an unforgiving policy reversal would surely “tar and feather” her legacy…to her, it seems, a too dangerous [see definition of coward above] risk.
Said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities…“They’re a real bunch of scaredy cats. You can’t be totally hostage to markets.” LaVorgna is correct. The Fed is being held hostage to the financial markets but, ironically, is in no mood to escape its captors despite so many clear opportunities. The lack of action, by Yellen, can only be described as cowardly.
