Fed’s Janet Yellen To Continue Punishing Savers

FORECASTS & TRENDS E-LETTER

by Gary D. Halbert

July 29, 2014

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.  Janet Yellen: No End to Zero Interest Rate Policy in Sight

5.  Foreign Demand For US Treasuries Hits New Record

Overview

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.

Fed Chair Janet Yellen

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

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