Federal Reserve Chair Janet Yellen has reached a pinnacle in her career. With her extensive knowledge as a PhD economist and nearly 40 years in various roles at the Fed, she is well-versed in economic principles. However, she’s currently facing substantial challenges in navigating the complexities of the economy through monetary policy.
Leading an economy is no simple task; it demands more than just textbook knowledge. Some answers defy conventional graphs and charts, while others call for a deep understanding of the nuanced landscape. Yellen, with evident intensity, is grappling with decisions that are proving to be anything but straightforward.
Right now, Yellen is caught in a dilemma. Economic data—the very foundation of her strategy—conflicts with what she feels compelled to do. Although the recent jobs report and an unemployment rate of 5% suggest that it’s time to raise interest rates, traditional central banking wisdom advises against such a move. The struggles plaguing U.S. manufacturing indicate that increasing rates now may severely impact this fragile sector.
Additionally, inflation remains below the Fed’s 2% target. Global trade is sluggish, with China’s export momentum stalling. The robust dollar complicates matters even further, creating obstacles for Chinese exports to Europe and constraining U.S. exports globally.
The Economic Landscape
As Yellen begins her day with a cup of coffee, she looks out at an increasingly foggy economic horizon. With each day that passes, uncertainty seems to grow.
While the unemployment rate is low, the labor participation rate tells a different story. The jobs created since the Great Recession have generally been lacking in quality, and economic growth remains tepid. There are signs that prices may be inclined to deflate, yet Yellen aims for inflation to rise.
Despite these challenges, Yellen must adhere to the Fed’s dual mandate of fostering maximum employment and ensuring price stability along with moderate long-term interest rates. The crucial decision between maintaining zero interest rates or implementing a modest 0.25% increase could determine her success or failure in fulfilling these objectives.
This situation underscores the absurdity stemming from years of radical monetary policy. The economy now relies heavily on exceptionally low credit rates, and even the thought of a slight increase triggers considerable unrest. The dollar trembles, stock markets react negatively, and various economic commentators express their concerns.
With hindsight always clearer, it raises the question: why would a Fed rate hike be justifiable now if it wasn’t six or twelve months ago? What has truly shifted to warrant such a decision?
The conditions do not present a compelling rationale. In fact, one could argue that Yellen’s optimal moment for a rate increase has already passed. She had opportunities in 2014, before the decline in oil prices and disruptions in global trade, yet she took no action.
A Fork in the Road
So, what should Yellen do amidst these uncertainties? There are numerous alternatives that might prove more fruitful than obsessing over monetary strategies.
Yellen could take a step back, resign from her position, and perhaps bake cookies for a local club or even consider a new hairstyle. Engaging in these simple tasks might offer more value than her fixation on the minutiae of federal funds rates.
Yet, monetary policy has been her life’s work, and now that she holds the reins, she is determined to get it right. The fear of making a misstep looms large.
But is there truly a significant difference between maintaining zero-bound rates or opting for a minimal increase? A 0.25% hike is not substantial enough to signify genuine normalization; it still equates to extreme intervention in markets, likely leading to further asset price distortions and market instability.
Undoubtedly, her apprehensions about making the wrong move have left her in this precarious position. For over two years, Yellen has repeatedly indicated that the time for action was imminent. Now, she finds herself facing a critical juncture—either she acts decisively, or risks being viewed as ineffective.
In summary, the landscape Yellen navigates is fraught with uncertainty. As she weighs her options, one cannot help but wonder if perhaps a broader perspective might yield insights far beyond the immediate scope of monetary policy.
Sincerely,
MN Gordon
for Economic Prism
