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Fed Chairman Yellen Sees Anemic Economic Growth
by John M. Curtis
(310) 204-8700
Copyright
June 20, 2014
All Rights Reserved.
Growing at a sluggish 0.1%, the U.S. Gross Domestic
Product growth rate for the first quarter of 2014, Federal Reserve Board Janet
Yellen hoped for better luck next quarter.
Yellen kept the Federal Funds Rate at zero to 0.25%, the same rate set by
former Federal Reserve Board Chairman Ben S. Bernanke in 2008. When the economy went into recession
in 2007, Bernanke took draconic steps to avoid another Great Depression. When Lehmann Brothers filed for
Chapter 11 Sept. 14, 2008 and the nation’s biggest banks ran out of cash,
Bernanke started buying $600 billion treasury bonds in Nov. 2008 to re-supply
cash to financial institutions. By
March 9, 2009, when the Dow Jones Industrials bottomed out at 6,547, Beranked
had bought a total of $1.75
trillion, peaking at $2.1 trillion in June 2010.
With the economy improving after taking the reins from Bernanke Feb. 3,
2014, Yellen started to taper QE3.
Since taking office, Yellen has reduced the government bond-buying
program called QE3 from $85 billion a month to $65 billion, hoping the Fed’s
zero interest rate policy was enough to stimulate the economy. Seeking a 2.1% growth rate in 2014,
Yellen hopes she can see the economy rebound from an abysmal first quarters
hovering at zero percent. Fed
officials hoped to lower long-term interest rates from 4% to 3.75%. Fearing the same kind of sluggish
growth that’s hit Japan’s economy for 30 years, Yellen hoped that low interest
rates and QE3 would eventually stimuilate economic growth. Yellen sees no end in sight to
today’s artificially low interest rates that have left seniors behind the
Eight-Ball in their retirement accounts.
Committed to reducing QE3, Yellen sees rock-bottom interest rates for the
foreseeable future. Yellen now
believes that even full employment won’t stimulate 2.1% GDP growth.
While federal budget deficit has been cut in three by President Barack
Obasma down to $492 billion from its 2009 peak of $1.4 trillion, the U.S.
employment picture offers no future guarantees.
“The Fed has its mandated targets, full employment and stable prices,”
said Cardiff Garcia, U.S. editor at FT Alphaville, predicting Yellen would
maintain the Fed’s low interest rate policy into the foreseeable future. “Even after we get back to where we
should be, even after the economy is at full capacity, interest rates are going
to be lower that you would historically otherwise suspect,” said Garcia, seeing
no signs that the Fed would hike rates.
Since Bernanke dropped the Federal Funds Rate to zero percent in 2008,
everyone’s wondered how long rates could stay at historic lows. Watching the GDP drop in Q1 to 0.1%,
Yellen has reservation keeping low rates and tapering QE3.
U.S. Commerce Department’s June 17 report of a 2% bump in core inflation,
subtracting out energy and food, caused Yellen to continue QE3 tapering, despite
leaving the Federal Funds Rate unchanged. “I think infrastructure spending would be great,” said Garcia, reflecting on a possible
fix to anemic growth rate. With an aging U.S. population and with manufacturing still centered in Asia, it’s
difficult to sustain robust GDP growth for the foreseeable future. “The FOMC’s projections for the
long-term federal funds rate target is also a little lower that it was . . . I
don’t want to make too much out of it but [stagnation is] what it might
suggest,” Garcia, seeing a similar scenario to the 30-year recession in Japan. Yellen believes reducing QE3 helps
prop up the U.S. dollar, while, at the same time, won’t be enough to get the
economy rolling to eventually improve today’s sluggish GDP growth.
Fed’s monetary policy can only do so much to restore U.S. GDP growth. Without the quantitative easing
started in 2008, former Fed Chairman Bernanke believes the U.S would have sunk
into another Great Depression.
Keeping interest rates at rock bottom and refunding the nation’s biggest
financial institutions helped keep capital into financial markets. Bernanke’s low interest rates and
quantitative easing kept Wall Street growing from its March 14, 2009 bottom of
6,545 to today’s record close at 16,947, another all-time high. Wall Street’s spectacular rise has
kept American business hiring, despite sluggish GDP growth. Gridlock in Congress hasn’t helped
GDP growth, with the Republican-led House continuing to slash budgets. Even the International Monetary Fund
urges Congress to launch more infrastructure spending—a Keynesian economics
approach that’s worked in the past.
Yellen finds herself caught between a rock-and-a-hard-place trying to get
a bitterly divided Congress to do its part to fix the economy. With the Sequester forcing Obama to slash budgets, there’s not enough spending on
infrastructure to create lasting government jobs to improve GDP growth. Working with federal mortgage
agencies Fannie Mae and Freddie Mac, Yellen hopes to lower down-payment and
debt-to-income ratios to allow more borrowers to buy real estate. While there’s little chance of
bringing manufacturing to the U.S. anytime soon, Yellen could help loosen
federal lending standards to enable more qualified borrowers to buy homes. Today’s overly strict federal
lending guidelines have kept the nation’s real estate market stagnant in most
areas. Funding infrastructure
programs and easing borrowing standards should help promote healthy GDP growth
without stimulating inflation.
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