IN THIS ISSUE:
1. Janet Yellen: The Most Liberal Fed Chief Ever?
2. Chair Yellen Reveals Her Liberal Keynesian Views
3. What Ms. Yellen Said in The New Yorker Interview
4. Yellen: No End to Zero Interest Rate Policy in Sight
5. Foreign Demand For US Treasuries Hits New Record
New revelations have suggested that our new Fed Chair, Janet Yellen, may be the most liberal person to ever hold the highest monetary office in the world. This news comes after a recent extended interview Ms. Yellen did with The New Yorker Magazine and her testimony before Congress earlier this month.
Today we’ll look into these revelations about Ms. Yellen and ponder what they might mean for Fed monetary policy going forward. Chair Yellen made it clear before Congress that she is quite willing to keep the zero interest rate policy (ZIRP) in place considerably longer than most forecasters have been thinking. That will continue to punish savers and those on fixed incomes.
Janet Yellen: The Most Liberal Fed Chief Ever?
When President Obama nominated Janet Yellen last year to replace outgoing Fed Chairman Ben Bernanke, you had to assume that she leaned at least somewhat to the left on the political spectrum. Otherwise, Obama would have passed her over in favor of someone more aligned with his ultra-liberal ideology.
Ms. Yellen certainly had the professional credentials to at least be considered for the top spot at the Fed. After all, she had served as the Vice-Chair of the Fed since April 2010. Prior to that, she was the president and CEO of the Federal Reserve Bank of San Francisco since mid-2004. Prior to that, she was the Chair of President Clinton’s Council of Economic Advisers.
No wonder then that Ms. Yellen was rather easily confirmed by the Senate to be the next Fed Chair. Senate Republicans raised some concerns about her views on monetary policy which she adeptly misdirected (not unusual for Fed nominees), and most observers concluded that she was just another Ben Bernanke.
Yet that view was shattered earlier this month when Ms. Yellen agreed to an extensive interview with The New Yorker Magazine. In that lengthy profile, Ms. Yellen revealed that she is not only a longstanding dedicated liberal politically, but also a fervent believer in Keynesian economics, which has long argued that big government and ever higher federal spending are the answers to most economic problems.
Ms. Yellen’s new revelations in The New Yorker interview earlier this month have raised a lot of eyebrows and suggest that she may be the most liberal Fed Chief in decades, if not ever. I will summarize what she had to say in the recent interview for you below.
Yet before I do, you might be wondering why it matters that Chair Yellen is a dedicated liberal and Keynesian. After all, the Fed Chair has only one vote out of 12 at the periodic Fed policy meetings. That is true, but the Fed Chair has enormous power to set the agenda for our central bank, which over the last six years has held short-term interest rates near zero and has purchased an unprecedented $4.4 trillion in Treasury and mortgage-backed bonds.
Chair Yellen Reveals Her Liberal Keynesian Agenda
Before I get into Ms. Yellen’s ideology and policy positions, it astounds me how people can get nominated for and voted into powerful government positions without disclosing their true beliefs on important issues. As noted above, most observers assumed that Janet Yellen was just another Bernanke-like Fed bureaucrat.
But just a few months after she was ensconced as the top monetary official in the world, she is confident enough to reveal that she is a dedicated liberal who believes that Keynesian policies are the answer to most, if not all, all of our economic problems. The New Yorker writer Nicholas Lemann said the following about Yellen after his extensive interview with her earlier this month:
“Yellen is notable not only for being the first female Fed Chair but also for being the most liberalsince Marriner Eccles, who held the job during the Roosevelt and Truman Administrations.” [Emphasis mine.]
Why was that not widely known before she became Fed Chair this year? Or even Fed Vice-Chair in early 2010? One can only wonder how her Senate confirmation vote (59-34) would have gone last December with the benefit of that information.
In any event, Ms. Yellen has been notably in the news recently, both for her New Yorker interview and her semi-annual testimony before Congress this month. Although Yellen’s carefully manicured semi-annual testimony to Congress earlier this month included mostly “Fedspeak,” it is becoming increasingly clear that she is different from her predecessors in the job. As noted above, she is willing to keep interest rates near zero for longer than expected.
While her tenure thus far may feel like a seamless extension of the Greenspan/Bernanke era, her comments in the recent New Yorker expose’ revealed that she has an agenda beyond the Fed’s dual mandate of maximum employment and stable prices. In addition, she does not seem to see the Fed’s mission as primarily to maintain the value of the dollar, promote stable financial markets or to fight inflation. This is all new public information about Ms. Yellen.
Investors should understand how much further Yellen is likely to push the stimulus envelope into unexplored territory. Despite her seemingly good intentions, she apparently does not understand that the Fed’s policy tools of low interest rates and money supply expansion do little or nothing to raise real incomes, lift people out of poverty or create jobs.
She also does not apparently understand that the Fed’s current zero-interest-rate policies deter savings and capital investment, prevent the creation of high paying jobs and increase the cost of living, especially for the poor.
It is also not clear whether Ms. Yellen understands that it has been the Fed’s massive quantitative easing (QE) which has driven the US equity markets to new record highs over the last five years. Surely she does, most observers assume, and if so, does that mean that she is sympathetic to Wall Street? Time will tell.
One must assume that Ms. Yellen understands how the Fed’s monetization of government debt through QE has prevented the government from having to raise taxes sharply and/or cut the social programs she believes are so vital to economic health. Surely she does.
Yet does she also know that these same monetary policies have been responsible for pushing up prices for basic necessities such as food, energy, shelter, etc.? Possibly not. Recent inflation data show that consumers are paying more for the things they need and spending less on the things they want. But in Congress earlier this month, Yellen simply brushed off this evidence as temporary “noise.” Does that mean she is a dove on inflation? Quite possibly.
Based on her New Yorker interview, it increasingly seems that Ms. Yellen sees ZIRP and QE as tools to promote progressive social policy and to essentially pick up where formal federal social programs leave off. Put simply, she may be the most dovish and politically leftist Fed Chair in the central bank’s history.
What Ms. Yellen Said in The New Yorker Interview
Before I get into what Yellen said in the interview, let me point out that it is rare for Fed officials, especially the chairperson, to be so open about their political views and so specific about their monetary leanings. But not Ms. Yellen!
In The New Yorker interview, she unabashedly presents herself as a liberal and a pure disciple of John Maynard Keynes. Keynes, a British economist in the 1920s and 1930s, was an outspoken advocate of increased government spending and weakening of the currency (Keynesianism) as a way to strengthen the economy. You would think we should have known this beforeYellen became the Fed Chair or Vice-Chair.
She also revealed that she was an opponent of economist Milton Friedman, Ronald Reagan and Alan Greenspan, figures who are widely credited with having led the rightward movement of US economic policy in the last three decades of the 20th century, which saw robust economic growth. Yellen referred to that era as “a dark period of economics.” Wow!
Perhaps the most telling passage in the eleven-page interview was an incident in the mid-1990s (related by Alan Blinder who was then a Fed governor along with Yellen). The two were apparently successful in nudging then Fed Chairman Alan Greenspan into a more dovish position on monetary policy. When the shift was made, the two agreed "...we might have just saved 500,000 jobs."
The belief that central bankers are empowered with the ability to create jobs (or eliminate jobs) is a dangerous delusion. As her commitment to social justice and progressivism is now a matter of public record, should we be concerned that she will push for more liberal monetary policy from the Fed for the duration of her tenure?
We don’t actually know. What we do know is that the current membership in the Fed Open Market Committee is highly tilted toward the liberal side, as I explained in detail on July 1.
Yellen: No End to Zero Interest Rate Policy in Sight
In her congressional appearances, Yellen made clear that the end of the Fed’s multi-year experiment with zero percent interest rates is nowhere in sight. In fact, the event is less identifiable today than it was before she took office and before the economy supposedly improved to the point where such support would no longer be needed.
Her testimony before Congress earlier this month called into question her comments earlier this year when she suggested that the first move to raise the Fed funds rate would not likely occur until at least six months after QE ended. Now she sounds like ZIRP could continue indefinitely.
During Ben Bernanke’s years as Chairman, the Fed frequently offered so-called “forward guidance” as to when rates might rise. Not any longer. At one point, Bernanke said rates might begin to rise once the unemployment rate fell below 6.5%. But when that happened earlier this year, Yellen said that it was merely one factor in a larger decision-making process.
But Yellen has gone even further, disregarding all previous thresholds and claiming that she will keep stimulating (ZIRP) as long as she believes that there is “slack” in the economy, which she defines as any level of unemployment above the level of “full employment.” Where that mythical level may be is open for interpretation, and that may be why she prefers it.
As noted above, the Fed's traditional “dual mandate” is to balance the need for job creation and price stability. But Yellen clearly sees jobs as her top priority over price stability. One wonders if she will put this priority aside and move forcefully to fight inflation when it officially flares up in the future. We’ll have to wait and see.
In summary, QE will come to an end in October, barring any major surprises. The Fed made that official in the minutes from the June 17-18 FOMC meeting. However, as for ZIRP, Yellen vows that she’ll keep short rates near zero indefinitely if she believes it’s needed. This is disappointing news for savers and those on fixed incomes.
Finally, keep in mind that the FOMC is meeting today and Wednesday, with its latest policy statement to be released tomorrow at 2:00 p.m. Eastern. Also, remember that the government will release its first estimate of 2Q GDP at 8:30 a.m. Eastern tomorrow morning. The consensus is +3.2% following -2.9% in the 1Q.
Foreign Demand For US Treasuries Hits New Record
The Fed is getting plenty of help in keeping US interest rates low from foreign countries that are buying a lot of our debt. Foreign buyers of US Treasury securities increased their holdings in May to another record high. The Treasury Department reported on July 16 that total foreign holdings of our debt rose 0.3% in May to $5.98 trillion, the largest ever.
The Wall Street Journal reported earlier this month that the Chinese government has gone on a torrid buying spree of US Treasury debt this year. According to the latest data for May, China has added $107 billion to its holdings this year.
If China keeps up this pace, that would mean purchases of apprx. $256 billion this year. That’s more than three times the 2013 pace when China bought only $81 billion. The new buying pushed Chinese holdings up to $1.27 trillion and makes it now the largest foreign holder of US debt.
Japan, which has also increased its holding of US debt this year, is now in second place at $1.22 trillion. The monthly Treasury report showed that holdings by Belgium, the #3 investor in US Treasuries, fell 1.1% to $362.4 billion. Holdings by the Caribbean banking centers, including the Bahamas, Bermuda and the Cayman Islands, rose 0.8% to $310.8 billion.
At the same time, Bloomberg reports that other emerging market central banks (not counting China) bought $49 billion in Treasuries in the 2Q of 2014, more than any quarter since 3Q of 2012.
Russia reduced its Treasury holdings by 4.3% to $111.4 billion and well below the recent high of $149.9 billion last October. Russia is in the midst of a recession and reportedly needs the money.
Foreign demand for Treasury debt is expected to stay strong this year, helped by a congressional agreement to avoid a fight over the US debt ceiling until March 2015. This strong demand for Treasuries helps to keep medium and long-term interest rates lower.
While the Fed has been tapering its QE purchases of Treasury notes and bonds, and will end the program entirely by the end of October, other central banks around the world have more than picked up the slack. This is another reason why 10-year and 30-year Treasury yields have come down this year, to the surprise of many.
The concern, of course, is that this large foreign demand for Treasuries will wane at some point, and interest rates will rise accordingly. But not if Janet Yellen has her way.
I’ll leave it there for today.
Very best regards,
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert, Mike Posey (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.