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Fed Chairman Yellen Hints at More Low Rates
by John M. Curtis
(310) 204-8700
Copyright
September 29, 2014 All Rights Reserved.
Willing to keep the unemployment rate lower than
the usual 5% benchmark before raising the federal funds rate, 68-year-old
Federal Reserved Board Chairman Janet Yellen hinted she might repeat former Fed
Chairman’s Alan Greenspan’s “mechanical approach” to raising rates. Greenspan started raising rates in
2004, one-quarter basis point, 16 times or 4 percent before his successor Ben S.
Bernanke took over Feb. 1, 2006.
Faced with a financial crisis of epic proportions in 2007, Bernanke slashed the
federal funds rate of zero-to-.25% Dec. 16, 2008, after Lehman Brothers declared
bankruptcy Sept. 14, 2008., followed a few months later by the Fed’s $25 billion
bailout of Bear Stearns and eventual sale to JP Morgan Chase for $2 a share
March 16, 2008. While the nation
slipped into the Great Recession, Wall Street dropped from a high of $14,162
Oct. 9, 2007 to rock bottom at 6,443.March 9, 2009.
In addition to rock-bottom interest rates, Bernanke began quantitative
easing or QE1 in Nov. 2007, buying a $600 billion in treasury bonds. By March 2009 the Fed has $1.75 trillion on its balance sheet, continuing to add to the
national debt. When QE2 rolled
around in Nov. 2010, the Fed added another $600 billion to its balance sheet
totaling more than $2.35 trillion.
While Wall Street started to show a pulse, the unemployment rate remained over
8%, prompting Bernanke to start QE3 Sept. 13, 2012, buying $40 billion in
treasuries every month. When that showed little effect the Bernanke upped the ante to $85 billion a month Dec.
12, 2012. By the time Bernanke left
office Feb. 3, 2014, he began tapering Fed’s treasury purchases $10 billion a
month. Less that a year after
Yellen took office, the Fed’s QE program will officially end completely in
October 2014.
Reading the tea leaves of corporate growth and hiring practices, Yellen
sees the prospects of Fed tightening in the foreseeable future. Former Fed officials now with
Barclay’s Captial Inc. Michael Gapen thinks Greenspan did the right thing in the
late 1990s ratcheting up interest rates.
Gapen said the late 1990s “was a very good period for the U.S. economy,
and Greenspan made the correct call on the policy.” Yet Gapen forgets that the Wall
Street bubble burst in March 2000, taking the Dow Jones Industrials down from a
peak of 11,772 Jan. 14, 2000, hitting a new bottom of 7,286 Oct. 9, 2002, losing
37.8% of its value. Gapen
conveniently forgets that Greenspan’s “irrational exuberance” continued fore
years under an atmosphere of low artificially low interest rates, fueling the
Dot-Com bubble that eventually brought down the markets, especially the
tech-rich Nasdaq only recently coming back.
When you consider that the Nasdaq hasn’t reached its March 10, 2000 peak
of 5,048 14 years later, it tells you about asset bubbles, especially inflated
equity markets. Many U.S. and
foreign companies trade today at unprecedented price-to-earnings ratios, showing
the kind of wild speculation before market crashes. No matter how much Wall Street’s cheerleaders on popular business channels say things are
different today, the nation’s biggest hedge and private fund managers know when
its time to take profits. Recent sideways markets shows that there’s simply too many savvy investors that know
markets have peaked out, whether or not the correction comes tomorrow or
sometime in a murky future. With
today’s unemployment rate at 6.1%, Yellen’s Fed is committed to keeping rates
low until the rate drops below 5% where there’s a growing risk of inflation
hitting the economy.
Fed watchers talk about NAIRU or the non-accelerating inflation rate of
unemployment, something that prompts a change in the Fed’s Open Market
Committee’s monetary policy. “We
need the economy to run a little hot for at least some period of time to
actually push inflation back to our objective,” New York Fed Chairman William C.
Dudley told Bloomberg New Sept. 22.
Dudley believes the inflation rate can exceed 2 percent before the Fed’s Open
Market Committee needs to change monetary policy toward an inflationary bias. Fed officials know that if Wall
Street melts down for any length of time, it could easily derail economic
growth. Any major Wall Street
sell-off would trigger corporate layoffs that could bump up unemployment, reduce
government tax revenues and expand federal budget deficits. Yellen expressed concerns about 7.3
million citizens unable to find full-time work.
Reading the tea leaves, Yellen knows that the European Union’s slowdown
could easily cross the Atlantic.
Some members of Yellen’s FOMC believe that artificially low interest rates could
fuel runaway inflation and a currency devaluation. So far, those concerns haven’t
materialized. Today’s low interest
rates could “contribute to the buildup of financial vulnerability and hence
increase risks of financial stability,” said New York Fed economics Tobias
Adrian and Nellie Liang, director of the Fed’s Office of Financial Stability
Policy and Research in Washington.
Yellen’s biggest concern with today’s 6.1% unemployment rate involves the
relative low labor participation, leaving millions in part-time employment. “They are going to try to thread a
needle,” said Richard Clarida, executive vice president of Newport-beach-based
$1.97 trillion Pacific Investment Mangement, believing Yellen’s on the right
track.
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