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Shutdown over, when will Janet Yellen dial back the Fed’s easy money policy?

There’s nothing normal about the U.S. economy these days


 

Eugene Hoshiko/AP

Before the Great Recession, Alan Greenspan, America’s rock-star central banker, was revered for his ability to move markets with the tone of his voice. But even he would envy the influence of the next Federal Reserve chief. President Obama’s new nominee, Janet Yellen, if confirmed, stands to inherit an increasingly powerful Fed at a historic moment. Her first task will be to address one of the most important and divisive questions facing the country: to taper—and thereby dial back the easy-money policies that have their roots in the Greenspan era—or not to taper?

Critics worry Yellen will continue the Fed’s policy of ultra-low interest rates and its $85-billion-a-month bond-buying stimulus program. As a vice-chair of the Fed, Yellen has been an architect and key supporter of these policies. As her opponents see it, the strategy is stoking inflation and asset bubbles that could ruin the economy. The website NoOnYellen.com, headed by a New York hedge fund manager, labelled her “a threat to the American standard of living.” Canada’s Finance Minister Jim Flaherty urged the U.S. to ditch its stimulus program “as quickly as they can.”

The trouble with the pro-taper argument is that inflation, despite the five years spent pouring trillions into the economy, is almost non-existent. The U.S. Consumer Price Index was up just 0.1 per cent in August. America, as Yellen has argued in the past, has more immediate problems, such as weak job growth. Unemployment has fallen to 7.3 per cent, from 10 per cent in 2009. But that’s far from the four and five per cent that were the norm in decades before the recession. Also missing? Consumer confidence, which, last week, dipped to a nine-month low. Yellen has described it as an important tailwind—“the faith most of us have . . . that recessions are temporary and that the economy will soon get back to normal.”

But there’s nothing normal about the U.S. economy these days. Five years after the recession, growth is barely topping two per cent. Meanwhile, America’s soaring debt has created a whole new crisis. Quantitative easing was a desperate measure for desperate times. Has enough changed to abandon it? Yellen’s answer will likely be no. It will need to happen, but too much evidence suggests now isn’t the right time.


 

Shutdown over, when will Janet Yellen dial back the Fed’s easy money policy?

  1. Given the US government’s and consumers’ addiction to cheap credit, I can’t see it happening. That doesn’t change the fact that it MUST happen. One cannot print to infinity – sooner or later after hammering the back of that ketchup bottle long enough, something comes out with a big splat. I would hope they’d try to tighten before that happens.

    • Why do you say this? They can print as much money as they want. They cannot run out of it. The only downside to printing money is inflation, and there is no inflation. But raising interest rates is bound to slow growth, slower growth is bound to drive up unemployment and government deficits, etc.

      • The ketchup bottle analogy. You missed that part.

        As for inflation, it’s all been flowing into the housing market (their housing “recovery” they’ve been talking about, and the stock market). Sooner or later it will make its way into the indices (which, believe it or not, do not include real estate prices).

        • Oh, gotcha. Been a while since I used a glass ketchup bottle. So we’re basically waiting for 2008 to happen again, but this time not to the chimney sweep with three houses but to dual income yuppies in modest, million-dollar urban townhouses.

          Still, slowing growth from 2% to 0% doesn’t strike me as a very effective way to deal with the housing market. Of course I have nothing better to suggest.

          • I was simply talking about the risks of letting easy money continue. The risks can appear rather suddenly, after it’s too late to prevent the damage. We might well need to slow the economy down if inflation takes off. I am old enough to remember the early 80s recession, when central banks had to crank up interest rates to over 20% to rein in inflation. And the early 90s when John Crow had interest rates 5 or 6 points higher than the US, because inflation in Canada was getting out of control. Both were severe, ugly recessions. I’d prefer central banks to raise rates slowly before it becomes necessary to bring the whole economy to its knees. A little medicine now, vs. a lot later. I am also of the belief that low interest rates can also have negative effects on long term economic growth, by permanently weakening insurance companies and people’s fixed income investments.

          • That is interesting, thank you.

  2. a) she isn’t in charge yet

    b) when did this become a deadline?

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