Janet Yellen’s Surprising Warning Of “Secular Stagnation” by Gary D. Halbert

by Gary D. Halbert

April 14, 2015


  1. Fed Chair Janet Yellen Warns of “Secular Stagnation”
  2. Bottom Line: The Fed Doesn’t Know When to Raise Rates
  3. As Fed Contemplates Liftoff, Investors Head for the Exits
  4. Free Trade Deals: Obama’s Big Chance to Help the US Economy


Speaking at a monetary conference hosted by the Federal Reserve Bank of San Francisco on March 27, Fed Chair Janet Yellen warned that the US economy might be facing “secular stagnation,” a prolonged period of below-trend economic growth or no growth at all.

While emphasizing that secular stagnation is not the Fed’s most likely scenario, Ms. Yellen nonetheless believes that it is a risk important enough to warn her colleagues about.  Secular stagnation is where Japan has been for most of the last 20 years. Given that, we should spend some time today and subsequently discussing this phenomenon and what it means for the economy should it rear its ugly head.

Following that discussion, we will take a look at the minutes from the March 17-18 Fed Open Market Committee (FOMC) meeting that were released last Wednesday. Those minutes described how the Committee decided to drop the word “patient” in its forward guidance as to when the central bank might decide to raise the Fed Funds rate this year.

The minutes are abundantly clear that there is widespread disagreement among the Committee members as to when the key lending rate should be increased. Some members still believe that “liftoff” should occur at the June meeting, while others prefer waiting until the September meeting, and still others think the Fed should wait until next year. I continue to believe the first rate hike will not occur prior to September of this year, if at all.

Finally, President Obama and Congress have an opportunity to help the US economy significantly in the weeks ahead. Two very important international trade agreements are on the table, and both should be passed in my opinion. The Trans-Atlantic Trade and Investment Partnership and the Trans-Pacific Partnership could create hundreds of thousands of new full-time jobs and over $100 billion in new exports each year. Let’s hope Congress passes both and Obama doesn’t veto them!

Fed Chair Janet Yellen Warns of “Secular Stagnation”

In her speech on March 27 at the Federal Reserve Bank in San Francisco, Ms. Yellen repeated her usual points about the Fed needing to begin normalizing the Fed Funds rate this year. She noted that the economy continues to recover; however, she did acknowledge that growth in the 1Q slowed somewhat, mainly due to the severe winter. Still, she maintained her general view of “cautious optimism.”

Yet later on in her lengthy speech in a section subtitled “Special Risks and Other Considerations” is where things got very interesting. The first of her special concerns about hiking interest rates began as follows:

Some recent studies have raised the prospect that the economies of the United States and other countries will grow more slowly in the future as a result of both demographic factors and a slower pace of productivity gains from technological advances.

At an extreme, such developments could even amount to a type of ‘secular stagnation,’ in which monetary policy would need to keep real interest rates persistently quite low relative to historical norms to promote full employment and price stability, absent a highly expansive fiscal policy.” [Emphasis mine.]

To take a step back, the term “secular stagnation” is not new. It was originally coined in the late 1930s in the Great Depression era and refers to the theory that an economy may become stuck in a long-term period of slow growth, low productivity and low interest rates, due to certain external factors.

Prior to Yellen’s March 27 speech, the last time the term secular stagnation was referred to was by former White House economic adviser Larry Summers, who in late 2013 suggested that the US might be mired in secular stagnation. So what exactly is secular stagnation?

In secular stagnation, people become so concerned about the economy that they obsess on saving money, rather than spending it and making longer-term capital investments in such things as infrastructure, education, etc. that are necessary to sustain future economic growth.

Over time, the absence of such capital investments, and consequently of economic growth, leads to declining levels of per capita income and eventually per capita savings. Once set in place, secular stagnation can become a self-fulfilling prophecy.

In April 2014, Brown University economists Gauti Eggertsson and Neil Mehrotra published a comprehensive model of secular stagnation, showing how income inequality and a drop in population growth, both of which we have now, could lead the economy into a period of slow growth as we have seen since the current recovery began.

Janet Yellen

Essentially, the economists’ point is that a surplus of individuals looking to save their money, combined with a lack of individuals looking to borrow and spend money, can lead interest rates to fall to unusually low levels. That can cause an economy to become mired in slow growth for longer than the historical economic models would predict – consequently making the stagnation secular (longer-lasting) rather than merely cyclical.

It is interesting that Chair Yellen chose to bring up secular stagnation in her latest public policy speech. The policy implications are clear: If the Fed is indeed worried about secular stagnation, this suggests that short-term interest rates will be kept lower for longer than is currently anticipated.

My guess is that Ms. Yellen does not want to raise interest rates this year, and that she raised the possibility of secular stagnation to give the Fed “cover” for not raising rates. She basically admitted as much in her latest speech in which she said that the mere possibility that the US could slip into economic quicksand “has important monetary policy implications for the near-term.”

I am very surprised that her concern about secular stagnation has not received more attention in the media. In any event, I will leave our discussion of secular stagnation there for today. I’m sure I will have more to say about it in the weeks and months to come.

Bottom Line: The Fed Doesn’t Know When to Raise Rates

As noted above, there is no consensus within the FOMC as to when to enact the first Fed Funds rate hike, or liftoff, as the Fed refers to it. The minutes from the March 17-18 policy meeting reveal a widespread disagreement among the Committee members regarding when the Fed should make its first move toward normalization. Take this excerpt:

Several participants judged that the economic data and outlook were likely to warrant beginning normalization [rate hike] at the June meeting. However, others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016.

The point is, there is no consensus among the Committee members. In addition, there is disagreement among the members as to how much the

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