The Weekly View: When Yellen Talks, People Listen
My thanks to Rod Smyth, Bill Ryder and Ken Liu for their ever-interesting letter, published by RiverFront. It is posted in the Subscriber's Area but here is the opening
Clarifying her view of quantitative easing (QE) asset purchases during her Senate confirmation hearing last Thursday, Federal Reserve Chairman nominee Janet Yellen said that, at this point, "the benefits exceed the costs." Although some within the Fed want to start reducing purchases and replace them with extended forward guidance on zero interest rates, Yellen seems to currently favor both forward guidance and keeping the purchase program in place for now. That said, she framed her dovish stance as promoting more robust economic growth to "regain the ground lost in the crisis and the recession" with the intent to end extraordinary monetary policies as soon as possible. Regarding the duration of QE, Yellen acknowledged that the Fed cannot expand its balance sheet forever: "The committee is focused on a variety of risks and recognizes that the longer this program continues, the more we will need to worry about those risks. So I do not see the program as continuing indefinitely… at each meeting we're attempting to assess whether or not the outlook is meeting the criterion that we've set out to begin to reduce the pace of purchases.
Despite the USA's considerable economic advantages of very competitive energy prices and a growing lead in technology, Janet Yellen is unlikely to find the US economy growing at the pace she would like for commencing QE tapering.
There are four reasons for this continued slow GDP growth: 1) it is less than five years since the US economy and stock market bottomed in 1Q 2009, and it takes longer to recover following a credit crisis recession; 2) similarly, the global economy remains soft; 3) wages are often lower or stagnant and unemployment is not coming down as quickly as hoped due to competition from smart machines; 4) the US Federal Government is a headwind in the face of GDP growth.