By Michal Lodziana
Domestic News Writer
Since Federal Reserve Chairman, Janet Yellen’s much anticipated inauguration in 2014, I have carefully followed her announcements. A countless number of my afternoons have been spent interpreting and analyzing what her opinions meant, for the both the U.S. and global economies. For the most part, I have taken her opinions seriously. However, as of late, I find little reason to trust what she says.
Immediately following the much anticipated rate hike in December 2015, the press was filled with optimism. I personally started seeing ads start to pop up on my computer screen, letting me know that I could “profit” in a rising rate environment.
Several media pundits claimed that the rate hike was sure sign that the economy was improving, and that further rate hikes were inevitable.
I however, was much less optimistic. In my eyes, the minuscule .25 percent increase in the Federal Fund rate, was nothing more than a token rate-hike, meant to buy the Federal Reserve more time to plan their next move.
Fast forward several months and investor sentiment is incredibly mixed. Numerous market “bulls” have turned “bearish” on the U.S. economy, meaning that they no longer think U.S. stocks will continue to rise steadily. CNBC analyst Jon Najarian, went as far as calling the rate-hike an outright mistake.
When pressed about the topic, Janet Yellen did the unthinkable. According to the Wall Street Journal, she stated that the Fed would consider the possibility of taking rates “negative”.
When I first learned of Janet Yellen’s suggestion of negative rates, I was in complete disbelief. Just 35 years earlier in our nation’s history, during a time of comparable economic uncertainty, the Saint Louis Fed’s own rate chart showed that base-line interest rate at the Federal Reserve, had reached a record high of 19.9 percent in June 1981.
While I do agree that raising interest rates back to levels on par with the 1980s would be foolish, it does pose an interesting question; why have Federal Reserve officials been so quick to change things? Why do we now so readily embrace a near zero-interest environment, when just decades ago, the Fed was advocating for the exact opposite?
While contemplating these question, I think back to Janet Yellen’s predecessors, Allan Greenspan and Ben Bernanke.
Although several years have passed since the great financial crisis of 2008, we mustn’t be too quick to forget the lessons learned from it. After all, it was Ben Bernanke himself, who suggested that, “September and October of 2008 was the worst financial crisis in global history, including the Great Depression.”
It is hard to deny that the loose credit policies endorsed by Allan Greenspan, contributed to the housing bubble of 2007, which ultimately contributed to the overall 2008 financial crisis.
Not to be outdone however, it was Bernanke, who on the eve of the “worst financial crisis in global history”, assured the Joint Economic Committee of the U.S. Congress that things were not a bad as they seemed. Money Morning reports that just 5 days after his relatively optimistic September 24th statement, the largest single day crash of the Dow Jones occurred, wiping out over $1.2 trillion in wealth.
With her predecessors credibility already severely blemished, Janet Yellen has done little to show that she will do better to preserve her own.
In addition to her outlandish suggestion of negative rates, at her most recent Federal Open Market Committee (FOMC) meeting, she cut the Fed’s expected rate hike count in half. According to Reuters, the Fed expects to raise rates twice this year, instead of the original projection of four rate hikes. This drastic change in monetary policy, shows how uncertain Yellen is about the global economy, and how nervous she is about what to do in the coming months.
I predict that Yellen will not reach her revised agenda of two rate hikes. At most we will have a single rate hike in 2016, and we will eventually be forced to scale back to 0 percent rates.
If time proves me to be correct, the remnants of Yellen’s credibility will be all but gone.
Contact Michal at
A version of this article appeared in the Tuesday, March 22nd print edition.
The opinions expressed in this article are those of the author and do not necessarily represent those of The Stillman Exchange publication.