5 Things To Ponder: Yellen Talk

July 24, 2014

19

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

This past week, Chairwoman Janet Yellen presented the Federal Reserve’s Semiannual Monetary Policy Report to the Congressional Committee on Banking, Housing, and Urban Affairs. While the financial markets were closely focused on clues as to the future direction of monetary policy and rate hikes (see “Analyzing Impact Of Fed Rate Hikes), I jumped into the fray to address her comments regarding the current employment situation and outlook. To be specific, I stated:

“The actual state of employment in the U.S. is likely far weaker than the economic statistics currently suggest. If this is indeed the case, it creates a potential for policy mistakes that could have negative consequences to both the economy and the financial markets.”

However, as the days have progressed since her testimony, there have been numerous reports and articles produced evaluating her statements and the Fed’s current trajectory regarding monetary policy. This weekend’s reading list of “Things To Ponder” is focused on the Fed’s current policy, their intentions and the potential of success or failure.

1) Yellen’s Interest Rate Dilemma by Yuval Rosenberg via The Fiscal Times

“Picture yourself alone in the wintry woods and the weather is touch-and-go. You have two matches, a pile of semi-dry kindling, some firewood and a canteen of water. There you are, deep in the forest, trying to build a fire in a bad situation, with a clear dilemma: If the fire grows too large, you run the risk of an uncontainable blaze. Then again, if the fire dies, so do you. What would you do? If the fire doesn’t start, freezing to death is the result. So you go with the big blaze, hoping the canteen of water will help you contain any errant flames.”

2) Monetary Policy And The Maginot Line by President Richard Fisher via FRB Dallas

“First, I believe we are experiencing financial excess that is of our own making. When money is dirt cheap and ubiquitous, it is in the nature of financial operators to reach for yield. There is a lot of talk about “macroprudential supervision” as a way to prevent financial excess from creating financial instability. My view is that it has significant utility but is not a sufficient preventative. Macroprudential supervision is something of a Maginot Line: It can be circumvented. Relying upon it to prevent financial instability provides an artificial sense of confidence.

Second, I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose too long. We did a good job in staving off the deflationary and depression risks that were present in the aftermath of the 2007–09 financial crisis. We now risk falling into the trap of fighting the last war rather than the present challenge. The economy is reaching our desired destination faster than we imagined.

Third, should we overstay our welcome, we risk not only doing damage to the economy but also being viewed as politically pliant.”

3) Why Traders Are Wrong About The Fed by Ron Insana via CNBC

“The fault in their stars was obvious to me. If no one, including the Fed, knows what zero interest rates and a bulging Fed balance sheet will do to the economy, then how can they?

Of course, one could argue that my own position relies on the same faulty logic, that I don’t know any better than anyone else as to how this will end.

I think there is considerably less risk in the markets and economy than the bears would suggest.

I remain steadfast in the belief that the Federal Reserve under Ben Bernanke, and now Janet Yellen, has done extraordinary research to support the polices being employed today.”

4) What If Janet Yellen Is Wrong? by Judy Shelton via The Sun

“But the muted rhetorical fireworks on Capitol Hill belie the fact that an incendiary debate is taking place as to whether current monetary policy is stimulating real growth or setting the stage for another financial meltdown. The Bank for International Settlements, a central bankers’ forum based in Switzerland, issued a no-holds-barred assessment two weeks ago warning that near-zero interest rates may be fueling asset bubbles while diverting funds away from productive long-term investment.

Which raises the question: What if Ms. Yellen is wrong?”

5) Damn These Unruly Markets, Fed Edition by Sigmund Holmes

“It is amazing what a mess – and a mess of contradictions – monetary policy has become. The Fed has urged people repeatedly over the last few years to take risk for the sake of economic growth and now they seem surprised that maybe people are taking more risk than they should.

I think part of the problem is that Yellen – and Bernanke before her – doesn’t understand what types of risk lead to sustainable economic growth. The type of risk taking behavior we need is in retreat. New business formation has been falling, the economy becoming less dynamic, over the last several decades. That’s the kind of risk taking that leads to growth and it isn’t something that can be conjured from the alchemy of modern monetary policy.”

Also Reads:

The Fed Needs To Raise Rates Now! by EconMatters

“You better start raising rates immediately as you are already behind the curve, and the fact that everybody is asking ‘Is the Fed behind the Curve’ and ‘Does the Fed see any Bubbles’ ought to concern the Federal Reserve. When the cabbie starts asking you if you are behind the curve, you are so far behind the curve it isn`t even debatable!”

Elizabeth Warren Torches Janet Yellen On Too-Big-To Fail via ZeroHedge

“In other words, readers are supposed to take Yellen’s claims at face value, when the Fed’s policy of saving banks by goosing asset prices and convincing itself that ordinary people would benefit because the “wealth effect” would lead to more consumption. The result has been widening income and wealth disparity and corporate profits at record levels as a percent of GDP, meaning workers are getting less than they’ve ever gotten.