While the federal government remains shut down President Obama confirmed Janet Yellen was his choice for succeeding Ben Bernanke.
Shutdown
The shutdown of the federal government is up and running, even though there are enough supporters for a clean continuing resolution in the House. The problem is now for this bill to be discussed despite the Speaker’s unwillingness to bring it to the vote. This is tricky, but not impossible and some Republican leaders – such as the Senate Minority Leader, Mitch Mc Connell – are actively trying to find a solution to reopen the government and raise the federal debt ceiling.
As for the damages caused by the shutdown, they become clearer by the day, with newspaper filed with all the disruptions provoked, the plunge in weekly consumer confidence and the first official data: weekly initial claims for unemployment benefits surged during the first week of the shutdown, even if most furloughed civil servants have had to wait an additional week to apply, as government contractors had to furlough employees in the wake of the absence of demand. The Congress managed to pass a piece of law that will allow furloughed civil servants to be paid once the government reopens, while all defence workers have been called back on the job. Still, this episode will cost the US growth few tenths of percentage. The real threat is to not raise the federal debt ceiling, and despite what some argues, there is no other way than raising it. the Treasury cannot prioritises payments (that would be fiscal policy) and neither can the President; invoking the 14th amendment or printing a platinum coin has been ruled out by the White House. House Representatives made the offer to increase the debt ceiling enough to cover funding needs for six weeks, but President Obama kept his word not to negotiate before they allow the government to reopen.
She’s the one
After Larry Summers threw the towel in, there was no big suspense about whom President Obama would nominate to chair the Fed. On Wednesday, it was made official: Janet L. Yellen will be the first Chairwoman of the Board of Governors of the Federal Reserve System. After being confirmed by the Senate, she will be succeeding Ben S. Bernanke, whose term as Chairman ends on January 31st, 2014. Janet Yellen has been serving as Vice-Chairwoman since 2010, after having been the President of the San Francisco Fed for six years. Prior to that she chaired President Clinton’s Council of Economic Advisers (1997-1999) and was a member of the Board of Governors between 1994 and 1997.
Beyond her extensive experience of economic policy, the nomination of Janet Yellen to head the Fed insures continuity in monetary policy. As Chairwoman-elect Yellen was at the centre of decisions made over the last three years, there is no reason for her to turn her back to commitments then made. It provides great clarity as about the US monetary policy: the definition of price stability (2% growth in the deflator for personal consumption expenditures; set in January 2012)will not be changed; the forward-guidance (the commitment not to raise interest rates before the unemployment rate falls below 6.5%, unless inflation expectations disanchor; adopted in December 2012) is here to stay; the reaction function behind the third wave of quantitative easing (QE3) remains the same.
Janet Yellen is seen as a super-dove, even more dovish than Chairman Bernanke. We completely disagree with this analysis, even if we do understand its roots, while, taking into account the current state of the US economy, this reputation is actually very welcome. In June 2012, Vice-Chairwoman Yellen gave a speech (“Perspectives on Monetary Policy” at the Boston Economic Club Dinner). She exhibited the brightest and clearest arguments supporting the commitment of the Fed to change its reaction function in the aftermath of a recession caused by deleveraging. She basically demonstrated that the longest the Fed Fund Target remains close to zero, the strongest the ensuing recovery.
From that speech, it was concluded that she was a super-dove. In a way, she actually managed to follow the treatment prescribed by Paul R. Krugman to “credibly promise to be irresponsible”: the general wisdom is that she will not fight inflation as toughly as the Fed does since Chairman Paul A. Volcker, that she will focus on the other mandate of the Fed, i.e. “to promote effectively the goals of maximum employment”. To be true, Janet Yellen was also the one to turn Alan Greenspan away from targeting a nil inflation rate, arguing that a little inflation was a good thing. Chairman Greenspan followed the advice, and this clever move is part of the reasons why the US actually avoided deflation in 2001 and 2008-09. But Vice-Chairwoman Yellen also tried, together with Laurence H. Meyer, to have the Fed increase rates as soon as in September 1996. That time, Alan Greenspan chose not to follow, waiting until March 1997 to finally make the move. Chairwoman-elect Yellen is a plain pragmatic, fighting the real monster when it shows up. And currently, this is under-employment, not a possible spike in inflation, which is actually running too slowly for comfort. At the September FOMC meeting, “inflation was forecast to be subdued through 2016”. The minutes of the meeting also show that the setting of an inflation floor was once more discussed.
The current state of the US economy is not very comforting. Job creations recorded a marked slowdown over the summer. The shutdown of the federal government will have a negative impact, even though failing to raise the federal debt ceiling would be way worse. In short, there is no reason to withdraw the monetary support provided by the Fed through security purchases. FOMC members were expecting to “taper” before the end of the year. This was before the summer… Their view changed, and with the insurance of continuity that comes with the nomination of Janet Yellen, QE3 could actually gain additional powerfulness. Early next year, it will be time for Chairwoman Yellen to slow down QE3. For her first rate hike, we will have to wait longer.
BY Alexandra ESTIOT
Shutdown
The shutdown of the federal government is up and running, even though there are enough supporters for a clean continuing resolution in the House. The problem is now for this bill to be discussed despite the Speaker’s unwillingness to bring it to the vote. This is tricky, but not impossible and some Republican leaders – such as the Senate Minority Leader, Mitch Mc Connell – are actively trying to find a solution to reopen the government and raise the federal debt ceiling.
As for the damages caused by the shutdown, they become clearer by the day, with newspaper filed with all the disruptions provoked, the plunge in weekly consumer confidence and the first official data: weekly initial claims for unemployment benefits surged during the first week of the shutdown, even if most furloughed civil servants have had to wait an additional week to apply, as government contractors had to furlough employees in the wake of the absence of demand. The Congress managed to pass a piece of law that will allow furloughed civil servants to be paid once the government reopens, while all defence workers have been called back on the job. Still, this episode will cost the US growth few tenths of percentage. The real threat is to not raise the federal debt ceiling, and despite what some argues, there is no other way than raising it. the Treasury cannot prioritises payments (that would be fiscal policy) and neither can the President; invoking the 14th amendment or printing a platinum coin has been ruled out by the White House. House Representatives made the offer to increase the debt ceiling enough to cover funding needs for six weeks, but President Obama kept his word not to negotiate before they allow the government to reopen.
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She’s the one
After Larry Summers threw the towel in, there was no big suspense about whom President Obama would nominate to chair the Fed. On Wednesday, it was made official: Janet L. Yellen will be the first Chairwoman of the Board of Governors of the Federal Reserve System. After being confirmed by the Senate, she will be succeeding Ben S. Bernanke, whose term as Chairman ends on January 31st, 2014. Janet Yellen has been serving as Vice-Chairwoman since 2010, after having been the President of the San Francisco Fed for six years. Prior to that she chaired President Clinton’s Council of Economic Advisers (1997-1999) and was a member of the Board of Governors between 1994 and 1997.
Beyond her extensive experience of economic policy, the nomination of Janet Yellen to head the Fed insures continuity in monetary policy. As Chairwoman-elect Yellen was at the centre of decisions made over the last three years, there is no reason for her to turn her back to commitments then made. It provides great clarity as about the US monetary policy: the definition of price stability (2% growth in the deflator for personal consumption expenditures; set in January 2012)will not be changed; the forward-guidance (the commitment not to raise interest rates before the unemployment rate falls below 6.5%, unless inflation expectations disanchor; adopted in December 2012) is here to stay; the reaction function behind the third wave of quantitative easing (QE3) remains the same.
Janet Yellen is seen as a super-dove, even more dovish than Chairman Bernanke. We completely disagree with this analysis, even if we do understand its roots, while, taking into account the current state of the US economy, this reputation is actually very welcome. In June 2012, Vice-Chairwoman Yellen gave a speech (“Perspectives on Monetary Policy” at the Boston Economic Club Dinner). She exhibited the brightest and clearest arguments supporting the commitment of the Fed to change its reaction function in the aftermath of a recession caused by deleveraging. She basically demonstrated that the longest the Fed Fund Target remains close to zero, the strongest the ensuing recovery.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.
From that speech, it was concluded that she was a super-dove. In a way, she actually managed to follow the treatment prescribed by Paul R. Krugman to “credibly promise to be irresponsible”: the general wisdom is that she will not fight inflation as toughly as the Fed does since Chairman Paul A. Volcker, that she will focus on the other mandate of the Fed, i.e. “to promote effectively the goals of maximum employment”. To be true, Janet Yellen was also the one to turn Alan Greenspan away from targeting a nil inflation rate, arguing that a little inflation was a good thing. Chairman Greenspan followed the advice, and this clever move is part of the reasons why the US actually avoided deflation in 2001 and 2008-09. But Vice-Chairwoman Yellen also tried, together with Laurence H. Meyer, to have the Fed increase rates as soon as in September 1996. That time, Alan Greenspan chose not to follow, waiting until March 1997 to finally make the move. Chairwoman-elect Yellen is a plain pragmatic, fighting the real monster when it shows up. And currently, this is under-employment, not a possible spike in inflation, which is actually running too slowly for comfort. At the September FOMC meeting, “inflation was forecast to be subdued through 2016”. The minutes of the meeting also show that the setting of an inflation floor was once more discussed.
The current state of the US economy is not very comforting. Job creations recorded a marked slowdown over the summer. The shutdown of the federal government will have a negative impact, even though failing to raise the federal debt ceiling would be way worse. In short, there is no reason to withdraw the monetary support provided by the Fed through security purchases. FOMC members were expecting to “taper” before the end of the year. This was before the summer… Their view changed, and with the insurance of continuity that comes with the nomination of Janet Yellen, QE3 could actually gain additional powerfulness. Early next year, it will be time for Chairwoman Yellen to slow down QE3. For her first rate hike, we will have to wait longer.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.
BY Alexandra ESTIOT
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