Yellen pledges soft money because of slack in economy
Federal Reserve Chairwoman Janet Yellen speaking at a conference in Chicago, highlighted “considerable slack” in the economy and labor market. She said the Fed is committed to keeping interest rates low for a long time.
Atlanta Fed President Dennis Lockhart said six months “is really a minimum, not a maximum.” Chicago’s Fed Bill Evans told reporters he would wait until early 2016 to raise interest rates, and he expected federal funds at 1.25% at the end of 2016. Evans said he is quite sympathetic to Minneapolis Fed’s Narayana Kocherlakota’
Janet Yellen has stated the $10 billion per month tapering of asset purchases is data dependent. Critics such as Fed watchers James Rickards and Michael Pento believe slowing economic data will delay the Fed taper.
Hedge Fund manager Kyle Bass does not believe the Fed will be able to raise the Fed funds any time in the foreseeable future. He does not see rate increases for 3 to 4 years. He believes money is rotating into the stock market and flowing out of bonds and cash. He believes equities are “the only game in town”, and will make the rich people richer, and the middle class worse off. His caveat is that Zimbabwe’s stock market was the best performer of this decade before it crashed.
Some critics believe the Fed is trapped in a zero rate policy (ZIRP), and will find it difficult to leave. In 2011, the US made $454 billion in interest payments with interest rates at or near 0%. If the national debt reaches $20 trillion at 5% interest, the interest expense would be $1 trillion annually.
An increase in interest rates would also effect corporate debt costs, the real estate market, and municipal bond costs. Also 82% of the $248 trillion in derivatives sitting on US commercial bank balance sheets are based on interest rates. If even 2% of these contracts are “at risk” and one quarter of those “at risk” contracts blow up, because of counterparty failure, the equity at the five largest US banks would be wiped out. The Fed does not want interest rates to rise sharply. They own approximately 31% of the total market of 10 year Treasuries.
Some authorities believe the Fed will raise Fed funds incrementally in stages between 2016 and 2019. Joseph Haubrich, an economist at the Cleveland Federal Reserve Bank, projects 2014 GDP to grow at the rate of 1.3 percent. He sees a steep yield curve indicating a growing economy. An inverted yield curve indicates tight monetary policy, and normally leads to a recession in about a year. Every recession since 1960 has been preceded by an inverted yield curve.
The Fed QE monetary policy has not increased inflation substantially because the increase in monetary base remained as banking reserves. However, as the economy recovers, the increased monetary base will cause inflation if banks substantially increase loans.
Some critics believe the Fed will forced to reign in its easy money policy if crude oil hits $150 a barrel, gold reaches $2000, and the S & P 500 hits 2500. Michael Pento believes the printing of money does not lead to economic prosperity, but only asset price bubbles. He believes the only way a nation can increase its GDP is to grow the labor force and increase the productivity of its workers through a stable currency and pro-business capitalism.
Financial advisor David Stockman believes artificially low interest rates is a nationalization of banking, and results in asset bubbles which benefit wealthy speculators at the expense of working people who face increased costs of nondiscretionary items such as food and energy.
Keynesian economics dominates the worldview of most economists employed by the world’s central banks. This worldview is based upon secular humanism which believes there is no personal God to whom man is accountable. However, one’s actions have consequences.
“Do not be deceived, God is not mocked, for whatever a man sows, he will also reap. For he who sows to his flesh (selfish ambitions and lack of Godly integrity) will reap…destruction.”
For more information on the economy and the war of worldviews see:
Dr. Stephen Johnston
Page Updated Last on: Apr 08, 2014