It was a rough night for Janet Yellen.
The immensity of the responsibility she shoulders tormented her. And today is the big day.
At 2pm Eastern Time, the world turns its eyes and ears to the Federal Reserve’s Open Market Committee, Janet Yellen presiding.
She can’t duck. She can’t go dumb. She has to take centre stage and do her shtick. Bloomberg:
‘The FOMC will weigh the impact on the U.S. outlook from slowing growth overseas and falling stock prices, as committee members determine whether to end almost seven years of near-zero interest rates. Economists are close to evenly divided on the outcome, with 59 of 113 surveyed by Bloomberg expecting the Fed to stand pat.’
What will Yellen say?
As little as possible, is our prediction.
She may propose a return to ‘normalcy’ that is so slow we may never get there, with quarter-percentage-point increases as long as the data is ‘permitting.’
But what a great moment in history! What a great opportunity to say something provocative…something that might even be true!
Poor Janet tossed and turned again last night, troubled by thoughts of what might be. What follows is the speech she might like to give at today’s press conference.
Money from nothing
‘Hi, Janet here. I’ve got an announcement to make. You know that rate hike you’re waiting for? Well, I need to talk to you about that.
‘The rate everyone is talking about is actually the interest rate we pay banks on their excess reserves. It’s all quite complicated. In fact, even I’m not 100% sure how it works. I leave the technical details to the back-office boys. What’s important is that this rate sets the base lending rate throughout the entire economy.
‘Where do those reserves come from in the first place? We create them out of thin air. All it takes is a few keystrokes at a computer terminal in the Eccles Building.
‘The more you think about it, the more absurd it is. Money is only useful when it represents buying power. It’s a claim on the available goods and services in the market.
‘We can create as many reserves as we want…and banks can loan as many dollars into existence as they want…but neither of us can create goods and services. So what we’re really doing is creating claims on someone else’s goods and services.
‘Naturally, the people who get those claims — the big banks and their big clients — are happy with this. Over the last seven years, they’ve enjoyed the transfer, to them (indirectly, of course), of trillions of dollars. Savers, on the other hand, have been stiffed.
‘How is this supposed to make people better off? Building wealth is a long, hard process. It involves learning, saving, working, risking, and forgoing immediate gratification in the hope of greater gratification later on. That what capitalism is all about.
‘As far as we know, there’s actually no way to speed up the process of wealth building, or make it safer, by creating money out of nothing. If there were, we would have learned from the examples in the history books.
‘Trouble is, the historical examples tell us it doesn’t work. That’s why we’re now talking about getting monetary policy back to “normal.”
‘We know that abnormal policy — trying to boost the supply of money (by making it cheaper for people to borrow) — almost always ends in some unpleasant way.
‘So far, we’ve been spared unpleasantness. We want to keep it that way — by getting back to “normal” before the distortions and malinvestment that comes with ultra-low interest rates cause us real trouble.’
Just a girl from Brooklyn
‘Look, I’m just a girl from Brooklyn who went to Fort Hamilton High School. Do you really expect me to manage the world economy? My father thought I should go into medicine. And maybe he was right. Doctors have real knowledge…not just this hocus-pocus of modern economics.
‘I’ve already proven I don’t know any more of what is going on than you do. The biggest financial disaster of the century, the housing bubble, hit me like it hit you — as a surprise.
‘Remember what I said after the housing bubble blew up? Let me remind you (and I quote)…
‘I guess I thought that, similar to the collapse of the stock market around the tech bubble, most likely the economy could withstand [the housing collapse] and the Fed could move to support the economy the way it had after the tech bubble collapsed.’
‘I’m just like everybody else, you see. I didn’t know what was going on and didn’t know what to think about it…except that it would probably be all right.
‘But what did you expect? You think I’m some sort of genius, or something?
‘Everything has to come to an end sometime. And seven years of this silly ZIRP seems like more than enough. Yes, we know that the stock market could crash. And yes, we know that a lot of businesses — who have come to depend on these ridiculous rates — could go broke.
‘But there’s no virtue in putting off the inevitable. When Humpty Dumpty is going to fall off the wall anyway, give him a push and get it over with.’
For Markets and Money, Australia