It’s an intriguing moment in our economic history. Many were eagerly anticipating insights from Janet Yellen during her address at the picturesque Jackson Hole, Wyoming. Specifically, we hoped for indications on when the federal funds rate, which has remained near zero for nearly six years, might actually rise.
However, the speech delivered did not meet these expectations. Instead, it was filled with vague assurances. Below are some selected highlights from Yellen’s remarks.
“During the FOMC’s latest meeting, the Committee assessed that ‘labor market conditions have improved,’ based on various indicators. Nonetheless, the Committee concluded that significant underutilization of labor resources persists.
“Given this evaluation, and in light of the Committee’s expectation that inflation will gradually rise toward its longer-run goal, they reaffirmed that it will likely be appropriate to maintain the existing target range for the federal funds rate for a considerable time after concluding the current asset purchase program. This is especially true if projected inflation remains below the Committee’s 2 percent long-term target, provided longer-term inflation expectations stay anchored. However, if labor market progress happens more quickly than the Committee anticipates or if inflation accelerates, leading to a faster alignment with our dual objectives, then increases in the federal funds rate could occur sooner and happen more rapidly than currently anticipated.
“Conversely, if economic performance is underwhelming and progress toward our goals is slower than expected, the future trajectory of interest rates would likely be more accommodating than we currently foresee.”
A Sick Dog
From Yellen’s comments, it appears that the Fed is somewhat adrift in its pricing strategy, showing little intention to raise the federal funds rate unless compelled by inflationary pressures.
While there are signs of improvement in labor markets, the Fed remains skeptical. They are acutely aware that the economy has not fully rebounded from the Great Recession. Although the unemployment rate has decreased, the labor participation rate has also declined.
A true economic recovery and boom have eluded us post-Great Recession. Working-class individuals have experienced stagnant wages for the past five years, while those at the upper echelons of the economic ladder have seen their assets swell impressively.
Indeed, the affluent have enjoyed unprecedented economic advantages. Yet, Yellen seems to overlook a crucial reality: the credit creation mechanism is malfunctioning, failing to distribute credit-based money effectively into the economy.
This is why the price inflation one might expect from the Fed’s aggressive tactics of inflating the money supply hasn’t materialized. The cheap credit supplied by the Fed mainly inflates financial assets rather than trickling down into the economy, causing gross domestic product to stumble along like an ailing animal.
What a Remarkable Time to be Alive
In essence, the pathway for Yellen’s monetary policy appears to have stalled. Instead of circulating into the broader economy, new money has often remained on bank balance sheets or has been utilized to purchase Treasuries. As of the previous day’s close, the yield on the 10-Year Treasury note was a mere 2.39 percent.
This lack of economic transmission, colloquially known in central banking circles as “pushing on a string,” illustrates the disconnect: the central bank may expand the money supply, but the circulation of this money into the economy fails to materialize. Consequently, despite the creation of vast amounts of new money, price inflation has not surged as one might expect.
Moreover, the effectiveness of cheap credit, which once significantly bolstered GDP from roughly 1940 to 2008, has waned. The formula that made Alan Greenspan “The Maestro” is no longer viable; the economy’s ability to handle increasing debt has been stretched to its limits.
Today, average jobs may struggle to cover typical mortgage payments. Entry-level positions for college graduates often fail to make even a dent in overwhelming student loan debts. Overall, the economy seems unable to fulfill all the financial commitments made on its behalf.
Yet, even with the constraints on debt, the stock market continues its ascent, drawing in eager investors. Yesterday, the S&P 500 climbed past the 2,000 mark for the very first time. Goodness! What a remarkable time to be alive.
Sincerely,
MN Gordon
for Economic Prism
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