Janet Yellen’s First Press Release: Quick Thoughts and Analysis.

Janet Yellen, Chairwoman of the Federal Reserve, recently solidified her reign by holding her first post-FOMC official press release. In the release, Ms. Yellen made some mildly interesting comments.

Previous chairman Ben Bernanke had maintained that inflation at 2% and unemployment at 6.5% would signal the Fed to begin winding down its asset purchase program. Ms. Yellen reiterated these points; however, she also indicated that the Fed would consider measures of labor market conditions, indicators of inflation pressures, and inflation expectations and readings on financial developments.”

The criteria is no longer just 2% inflation and 6.5% unemployment. Yellen has added a bunch of other indicators. Now she says that these numbers will be examined in the context of the aforementioned conditions and not necessarily considered on their own volition. This is probably because unemployment has strayed dangerously close to the 6.5% mark, yet the economy is still weak. Of course, this unemployment rate is not representative of a healthy economy; it’s because more people have dropped out of the labor market entirely, at which time they are not longer counted as “unemployed”. The unemployment rate is lowering, but not because of positive momentum in the economy. Yellen knows this, although she may not admit it. Her flim-flamming on the criteria to end the Fed’s asset purchase program is an implicit acknowledgement of this.

Prior to Yellen’s ascension to the Chair, many speculated that she would move the goalposts regarding the end of the Fed’s expansion of the monetary base (inflation). They were wrong. Yellen did not move the goalposts; she has removed the goalposts entirely. The Federal Reserve intends to continue Quantitative Easing indefinitely, like I have discussed here. There is no “exit strategy” for the Federal Reserve from the markets.

The Federal Reserve has begun a slow decrease in asset purchases. Ms. Yellen declared that the Federal Reserve would press on with its intended taper, decreasing monthly asset purchases from $65 billion per month to $55 billion per month. She also maintained that throughout the year, the Fed would continue to wind down purchases until zero. When the Fed’s asset program winds down to zero, everyone will be waiting for the Fed to begin selling off it’s asset portfolio, a deflationary measure to raise interest rates.

Ms. Yellen, when asked how long it would take before the Fed would raise rates, replied: “Six months”. That practically knocked the wind out of me when I read that. I have sincere doubts that the economy will be able to absorb any interest rates much higher than zero after six months. Rising rates will likely produce another recession. Is the Fed going to continue raising rates in a recession? Of course not. They’re going to return to the punchbowl, as a dog returns to it’s own vomit. Monetary base expansion will begin again. Rates will go back to near zero.

The thing to take away from all this is that the Federal Reserve has really screwed us. If the recession had been allowed to run it’s course in 2008, the markets would have cleared and we could have returned to a much healthier economy in a year or two. Instead, the esteemed economic scientists at the Fed jumped into action and have thus far stretched out the 2008 financial downturn into the Great Recession, with no true end in sight. The economic “scientists” at the Fed have no clue what they’re doing.

 

 

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