The Federal Reserve System and its chair, Janet Yellen, once again are in the news.
The legitimate role of Congress would be to engage in a countercyclical fiscal policy to compensate for deficient aggregate demand. i.e., the reason for our slow economic recovery. In other words, there is slack in the economy that could be taken up with targeted federal spending on roads, bridges, rail transportation, national parks, and aid to communities for decaying water and sewerage systems.
Unfortunately, fiscal policy oriented toward macroeconomic stabilization has long been tied up with the broader partisan controversy on federal spending and the role of government in the economy. As rational political debate on federal spending is out of the question, the Congress has opted out of its legitimate role in fiscal policy as related to our economy. Therefore, it was left to the Federal Reserve System and monetary policy to deal with the Great Recession.
The Fed addresses macroeconomic stabilization through monetary policy. The "wrong" monetary policy can do a lot of damage, and the "right" monetary policy can be of only limited assistance in getting the nation out of recession.
During recession as we had beginning in 2008, correct monetary policy calls for reducing short-term interest rates, and making money and credit more available for business and consumer loans. The expansion of the money supply and reserves available to the commercial banking system for lending became dubbed as "quantitative easing," an awkward term for what was anciently known as "expansionary monetary policy."
The Fed under previous chair, Ben Bernanke, and current chair, Janet Yellen, has kept short-term interest rates low, clearly what they should have been, and need to continue doing. For this, the Fed has been blasted by some critics who have insisted that this expansionary monetary policy would lead to severe inflation. These wild predictions for inflation have not come to pass.
This is not to say that inflation is forever tamed. Surely it is always possible in the future. But during the past seven or so years, the greater threat was continued recession, unemployment, and worse. Few would argue that the Fed should have raised short-term rates during the Great Recession.
There is usually a downside to policy actions. One of the downsides of low interest rates is that retirees depending on interest for income have received low returns. This illustrates the truism that, whether it's economic policy or foreign policy, policy-makers are often faced with undesirable alternatives, and must select what appears to be the least undesirable. In this case, the greater risk was a deepening of the recession. The right move was to keep interest rates low, leading to my next point.
Interest rates will not stay low forever. Wall Street acts as nervous as a cat in a room full of rocking chairs with every utterance of Fed Chair Yellen, fearing that she will indicate a rise in interest rates. They try every way they can to get some notion of when, oh when, will the Fed begin to raise interest rates.
It seems not to matter that Ms. Yellen has given no indication that the Fed would do anything rash. She continues to counsel patience, and assures the nation that only when the Fed is confident that the economic recovery is strong enough, will it begin to raise interest rates.
Conventional wisdom is that the expansionary monetary policy and low interest rates of the Fed are largely responsible for record high stock prices. A major link between interest rates and high stock prices is that with returns on savings instruments so low, and the risk of capital loss on bonds should interest rates rise (bond prices and interest rates are inversely related), the return on high quality dividend-paying stocks looks attractive.
That said, I am among those economists who believe there are other reasons for high stock prices, namely strong corporate profits. And, Wall Street would do better to focus on the overall economy than merely on Fed policy. But money managers manage billions. If Wall Street money managers believe that rising interest rates will bring stock prices down, they may act in such a way as to bring about a self-fulfilling prophecy.
Economists can't predict the future, but neither can anyone else. But if the Fed raises interest rates in conjunction with an improving economy, this would not seem to logically bring about a market crash, or even a significant decline, and certainly not in the long run. Serious investment funds, especially retirement funds, should be geared for the long run. Playing the market to profit from short-term fluctuations is a fool's game.
With the Fed becoming the major national institution in macroeconomic policy, it could only be expected that members of Congress would weigh in, never mind that the Congress has abandoned its legitimate role in economic stabilization.
In the past, Fed policy was oriented mainly toward preventing inflation. In more recent times, policy has been more broadly oriented to include the level of employment. During Yellen's recent testimony before Congress, she was criticized for ostensibly advancing "liberal policy goals."
Specifically, Republicans, referring to an earlier speech she delivered on income inequality, expressed anger over this. A South Carolina Republican criticized her for speaking of "issues outside your jurisdiction," and "sticking your nose in places where you have no places to be." Northern Wisconsin's Congressman Sean Duffy accused her of showing political bias because Democrats were campaigning on that issue.
Chair Yellen, justifiably in my view, testily retorted that in mentioning income inequality, she had made no policy recommendations in that speech, and that she was discussing a significant problem that faces America.
So, politics and the Fed; it goes on.
Next week: More politics and the Fed
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
The legitimate role of Congress would be to engage in a countercyclical fiscal policy to compensate for deficient aggregate demand. i.e., the reason for our slow economic recovery. In other words, there is slack in the economy that could be taken up with targeted federal spending on roads, bridges, rail transportation, national parks, and aid to communities for decaying water and sewerage systems.
Unfortunately, fiscal policy oriented toward macroeconomic stabilization has long been tied up with the broader partisan controversy on federal spending and the role of government in the economy. As rational political debate on federal spending is out of the question, the Congress has opted out of its legitimate role in fiscal policy as related to our economy. Therefore, it was left to the Federal Reserve System and monetary policy to deal with the Great Recession.
The Fed addresses macroeconomic stabilization through monetary policy. The "wrong" monetary policy can do a lot of damage, and the "right" monetary policy can be of only limited assistance in getting the nation out of recession.
During recession as we had beginning in 2008, correct monetary policy calls for reducing short-term interest rates, and making money and credit more available for business and consumer loans. The expansion of the money supply and reserves available to the commercial banking system for lending became dubbed as "quantitative easing," an awkward term for what was anciently known as "expansionary monetary policy."
The Fed under previous chair, Ben Bernanke, and current chair, Janet Yellen, has kept short-term interest rates low, clearly what they should have been, and need to continue doing. For this, the Fed has been blasted by some critics who have insisted that this expansionary monetary policy would lead to severe inflation. These wild predictions for inflation have not come to pass.
This is not to say that inflation is forever tamed. Surely it is always possible in the future. But during the past seven or so years, the greater threat was continued recession, unemployment, and worse. Few would argue that the Fed should have raised short-term rates during the Great Recession.
There is usually a downside to policy actions. One of the downsides of low interest rates is that retirees depending on interest for income have received low returns. This illustrates the truism that, whether it's economic policy or foreign policy, policy-makers are often faced with undesirable alternatives, and must select what appears to be the least undesirable. In this case, the greater risk was a deepening of the recession. The right move was to keep interest rates low, leading to my next point.
Interest rates will not stay low forever. Wall Street acts as nervous as a cat in a room full of rocking chairs with every utterance of Fed Chair Yellen, fearing that she will indicate a rise in interest rates. They try every way they can to get some notion of when, oh when, will the Fed begin to raise interest rates.
It seems not to matter that Ms. Yellen has given no indication that the Fed would do anything rash. She continues to counsel patience, and assures the nation that only when the Fed is confident that the economic recovery is strong enough, will it begin to raise interest rates.
Conventional wisdom is that the expansionary monetary policy and low interest rates of the Fed are largely responsible for record high stock prices. A major link between interest rates and high stock prices is that with returns on savings instruments so low, and the risk of capital loss on bonds should interest rates rise (bond prices and interest rates are inversely related), the return on high quality dividend-paying stocks looks attractive.
That said, I am among those economists who believe there are other reasons for high stock prices, namely strong corporate profits. And, Wall Street would do better to focus on the overall economy than merely on Fed policy. But money managers manage billions. If Wall Street money managers believe that rising interest rates will bring stock prices down, they may act in such a way as to bring about a self-fulfilling prophecy.
Economists can't predict the future, but neither can anyone else. But if the Fed raises interest rates in conjunction with an improving economy, this would not seem to logically bring about a market crash, or even a significant decline, and certainly not in the long run. Serious investment funds, especially retirement funds, should be geared for the long run. Playing the market to profit from short-term fluctuations is a fool's game.
With the Fed becoming the major national institution in macroeconomic policy, it could only be expected that members of Congress would weigh in, never mind that the Congress has abandoned its legitimate role in economic stabilization.
In the past, Fed policy was oriented mainly toward preventing inflation. In more recent times, policy has been more broadly oriented to include the level of employment. During Yellen's recent testimony before Congress, she was criticized for ostensibly advancing "liberal policy goals."
Specifically, Republicans, referring to an earlier speech she delivered on income inequality, expressed anger over this. A South Carolina Republican criticized her for speaking of "issues outside your jurisdiction," and "sticking your nose in places where you have no places to be." Northern Wisconsin's Congressman Sean Duffy accused her of showing political bias because Democrats were campaigning on that issue.
Chair Yellen, justifiably in my view, testily retorted that in mentioning income inequality, she had made no policy recommendations in that speech, and that she was discussing a significant problem that faces America.
So, politics and the Fed; it goes on.
Next week: More politics and the Fed
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
