It’s your move, Yellen!
All eyes are on chair of the US Federal Reserve, Janet Yellen, today. She fronts the US Congress. It’s one of her twice-yearly appearances in front of a Joint Economic Committee (members of both the House and the Senate). Investors will be hanging on her every word.
Don’t expect her to say much about quantitative easing (QE) or negative interest rates (NIRP). That’s the same old game they’re trying in Japan. The result is falling stock prices and negative bond yields (although Japanese ten-year yields were steadfastly zero when last I checked). Nothing Yellen could say about NIRP and QE – short of ordering the helicopters into battle stations – would relieve markets.
What she can say is that the Fed is unlikely to raise rates at its next scheduled meeting in mid-March. She won’t come right out and say that. But she can use her powerful vocabulary and subtle vocal stylings to suggest that the Fed’s rate hike campaign was done with one. That will reassure markets that US rates are no longer headed up, and the global credit may loosen again.
For Yellen to even hint that the Fed isn’t “normalising” rates, shows you how abnormal the world is. The central bankers have boxed themselves in. That’s why you should look for a resurgence of interest in “fiscal policy” to rev up the global economy (although I consider the matter hopeless… the monetarists are pushing on the limpest string ever).
Fiscal policy is governments running deficits by design to promote growth. Politically, running even bigger deficits is hard to do, especially with government debt-to-GDP ratios already high in the Western world. But that’s where helicopter money or outright debt monetisation comes in.
The Treasury issues bonds
The central bank buys them with newly printed money. The money goes directly into transfer payments (individual pockets) or new spending programmes. The helicopters will be carefully camouflaged. But it will rain Benjamins all the same (unless they’re banned, in which case, digital dead presidents).
Please note, the Fed doesn’t like the appearance that it’s intervening in a federal election. March is probably the last time it can act without being accused of political interference in the US presidential election. The dilemma isn’t quite as bad this year because neither the incumbent president nor the vice president is on the ballot (yet). And candidates from both parties are running against President Obama’s economic record.
Any Fed rate action after March won’t be seen as clearly favouring or damaging the incumbent. Still, in a normal election cycle, the Fed wouldn’t have a lot of flexibility to raise rates in the next six months. Today’s comments from Yellen could be revealing, and the strongest you’ll see for a while. Stay tuned.
One last comment: the Fed ought to have the courage to do nothing. As the Austrian school of economics shows, a recession is actually an economy getting healthier in the same way that a fever is a sign that the body is purging itself of what ails it. Burn out the disease.
Our current problem is that the Keynesian meddlers prevented a proper recession in 2008. The longer they prevent the recession, the bigger and the worse it will be. And it will be.
Category: Central Banks