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.