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Janet’s Woes

02/19/2017

The two primary methods of controlling the economy are monetary policy (by the Fed) and fiscal policy (by Congress).  Since the 2008/9 Global Financial Crisis, the United States has only had monetary policy to control the economy, as Congress has been worse than useless.  To the extent that our economy has recovered, we can thank the Fed.  However, the good news is that, as monetary policy has reached its limits, fiscal policy may come back to life, thanks to the elimination of gridlock last November.  For years, the stock market has over-reacted to any possible action by the Fed.  Today, it is starting to over-react to anything on Capitol Hill.

This should be good news for Fed Head Janet Yellen and the Board of Governors.  They want to “normalize” interest rates, which is Fed-speak for raising rates, and they should, but they face some conflicting pressures.

First, there are the Libertarians, who believe anything-the-government-does-is wrong.  They believe that holding interest rates so low for so long was an illegal action to punish one class of Americans, i.e., the savers.  They believe low interest rates have chased money out of bonds and into stocks, creating a terrible bubble, which is untrue.  Also, because the government is always wrong, they are worried that the government now agrees with them and want to increase interest rates, which must therefore be wrong.  They also want even more audits of the Fed, as well as reducing the Fed’s independence.

Second, there are the Republicans, whose sole belief system is that they-get-credit-for-anything-that-goes-right-and-Democrats-get-blamed-for-anything-that-goes-wrong, which perfectly mirrors the sole belief system of the Democrats.  More to the point, they would not confirm Jesus Christ to the Fed’s Board of Governors if nominated by a Democrat.  There are now four vacancies on the Board of eight governors.  In a population of 340 million people, they cannot find four qualified people???  The governor tasked with bank regulation just resigned.

Then, there is the Presidential problem.  Libertarians wanted to raise interest rates years ago, and now so does Janet.  But, the President has already said the dollar is too strong, which hurts American exporters.  Raising rates will normally make the dollar even stronger, reducing demand for American-made products.  In addition, rising interest rates cause income capitalization rates to rise, which causes the value of commercial real estate to fall.  So, professionally and personally, the President doesn’t see the need for higher interest rates.

My expectation is that she will get the “last laugh,” raising rates once or twice before her term expires next January, when she will be ceremoniously dumped by the President and will exit like Frank Sinatra, doing it her way!

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