September 16, 2021

Yellen Joins The Party

Yellen Joins The Party
Yellen Joins The Party

When then-President-Elect Joe Biden nominated Janet Yellen to be his Treasury secretary last month, the markets rejoiced. The former Federal Reserve chair was a known quantity, and investors hate uncertainty – they knew what they were getting. Even better, they liked what they were getting—a monetary dove who favors low-interest rates and supports an interventionist government and Fed. While she wouldn’t be on the Fed in her new role, she still holds the same views.

Moreover, since she is Jerome Powell’s immediate predecessor, and they both worked together on the Fed for several years, it was pretty much a given that the two will work closely and harmoniously together for the good of the country, as the times demand.

But the markets were also relieved that Biden did not bow to the so-called progressives on the extreme left of his party and pick someone more to their liking, instead choosing someone with safe, relatively moderate views that both parties could support – as indeed they did, by an 84-15 Senate vote. In other words, Biden wanted – and the markets demanded – an adult in the room, and that’s what they got with Yellen.

Or did they? After some of her most recent comments, you have to wonder. While Biden may not have given in to his left to pick a more extreme nominee, Yellen seems to be paying tribute to them.

When Biden announced his $1.9 trillion stimulus proposal, Treasury bond prices immediately dropped, and interest rates jumped on the fear that even more government spending would eventually lead to inflation. But Yellen quickly came to the defense, proclaiming that she wasn’t worried about inflation and that historically low-interest rates could easily accommodate more deficit spending. Indeed, she said, now was the time to pile on more debt. The greater risk, she said, would be in not spending enough.

“We face a huge economic challenge here and tremendous suffering in the country. We have got to address that,” Yellen said. “That’s the biggest risk.”

Since then, she’s basically doubled down on that thinking. While Biden seemed to be retreating a little on some of his earlier promises, like $2,000 stimulus checks for most Americans and a $15 federal minimum wage, Yellen came to the rescue. When some Democrats proposed lowering the income eligibility for stimulus checks to $50,000, Yellen immediately said she favored raising the threshold to $60,000. (Since then, the Democrats have climbed back to a $75,000 threshold, the same as for last year’s checks).

To justify her support for more spending, Yellen has constantly talked the economy down. While most economic projections for this year point to a strong rebound – to the tune of a 4% increase or more in GDP – Yellen has joined her former Fed colleagues in projecting even more dire times ahead of us whether or not economic indicators validate that thinking.

“I’m afraid that the job market is stalling,” she told Face the Nation on Sunday. “We saw that in Friday’s [January] unemployment report, just 6,000 private-sector jobs created, 49,000 overall, and that’s after a month in which we actually saw job loss. We have 10 million people unemployed, four million have dropped out of the labor market, and another two million are working part-time who really would like full-time work. We’re in a deep hole with respect to the job market and a long way to dig out.”

Undoubtedly, as Yellen said, many people and businesses are indeed suffering. But the overall economy simply is not in the dire straits she and some members of the Fed and the administration keep telling us – it just ain’t so. Drive by your local Walmart if you don’t believe me.

Which leads one to believe that the Janet Yellen the markets were expecting isn’t the Yellen they’re getting. Clearly, she has imbibed the Kool-Aid of Modern Monetary Theory and likes the taste of it.

But is that necessarily a bad thing if you’re an investor?

Runaway deficit spending and a large national debt used to be considered bad things, but now we all know better. They are nothing to be afraid of – indeed, they should be embraced, not only as a temporary, necessary expedient to deal with the current crisis but as normal government fiscal and monetary policy going forward. (Next up – Universal Basic Income).

And investors have been richly rewarded as a result. Stock prices keep going up, and even when they sometimes stall and even tank, like they did a year ago, they jump right back up again and hit even greater heights, thanks to more stimulus. Deficits really don’t matter.

So if Janet Yellen isn’t worrying, neither should you.

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George Yacik
INO.com Contributor – Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.