Everybody relax. Janet Yellen is in the house…or she will be pretty soon.
Yesterday, President Obama nominated her to take over the leadership of the US Federal Reserve from Ben Bernanke in January next year. It was enough to get the markets to ‘shrug off’ the pesky debt ceiling issues and rally for the first time in days.
This is despite the fact that just about everyone already knew that Yellen had the gig, after (the brilliant) Larry Summers decided to withdraw from the race last month.
Yellen is expected to pick up where Bernanke left off. So QE will continue. The word ‘taper’ will slowly drift out of the financial lexicon until a new buzzword enters the arena.
But wait. Minutes of the Fed’s most recent meeting suggest that the ‘taper’ is still on the agenda. The majority of Fed officials seem to think the beginning of the end of QE starts this year, and will phase out sometime in 2014.
Well, maybe that’s how the textbooks say it should be done. But harsh reality is likely to provide a more potent lesson. Because if QE ends at the same time that foreign investors lose their appetite for even more Treasury debt, you’ll see interest rates soar and the economy tip into recession.
So, unless we see a big turnaround in foreign demand for US debt, taper is off the table for a looong time.
Even if foreign demand picks up, we can’t see taper on the horizon. That’s because Yellen thinks QE improves employment. She is a believer in QE lifting ‘aggregate demand’, and an increase in aggregate demand increases employment.
Ambrose Evans-Pritchard over at the London Telegraph quoted a disturbing sentence from one of Yellen’s speeches earlier this year in relation to employment. Recall that yesterday we discussed how the problems with the US economy, and its inability to ‘recover’, were due to deep structural flaws.
Well, Yellen thinks the employment problems are cyclical, not structural, and therefore thinks QE is a policy that can improve the situation. Here’s the quote:
‘If the current, elevated rate of unemployment is largely cyclical, then the straightforward solution is to take action to raise aggregate demand. If unemployment is instead substantially structural, some worry that attempts to raise aggregate demand will have little effect on unemployment and serve only to stoke inflation.
‘I see the evidence as consistent with the view that the increase in unemployment since the onset of the Great Recession has been largely cyclical and not structural.‘
So cyclical the problems are, and therefore entirely within the realm of QE to fix. No wonder the market rallied today, albeit meekly.
Yet commodity markets were down across the board. They’re not buying the Yellen/cyclicality ruse.
for Markets and Money