Three Views on Janet Yellen, the Fed’s New Printer-in-Chief

Janet Yellen, the nominee to replace Ben Bernanke as the chairman of the Federal Reserve, testified in front of the Senate Banking Committee in Washington today.

Yellen will take over Bernanke’s quantitative-easing policy, which costs $85 billion a month. A noted “dove,” Yellen is expected to keep the stimulus program in place until the economy posts robust growth.

What follows are analyses on the hearing from Money and Markets newsletter editors Charles Goyette, Doug Davenport and Mike Larson.

Charles Goyette

The real problem with the Federal Reserve is central banking itself.

It is the mission that matters most, not the personnel. No matter who is in charge at the Fed, the basic Keynesian, fiat money policies that serve the interests of the banking cartel prevail.

That is why the value of the dollar has plunged under 100 years of the Fed’s existence, through a succession of chairmen.

No matter which party holds sway in Washington, the same policies persist.

That is why Alan Greenspan was appointed by Republican Ronald Reagan and reappointed by Democrat Bill Clinton. That is why Ben Bernanke was appointed by Republican George Bush and reappointed by Democrat Barack Obama.

They all worship at the same statist monetary church and follow the same Keynesian priesthood.

That said, some are more devoted members of the faith. Janet Yellen has a deserved reputation as a fervent believer. That means that she can be expected to try to carry the Fed’s monetary madness to its logical conclusion: money printing with enthusiasm until the world rejects the global dollar standard.

Sen. Rand Paul is in a state of virtual alarm about Yellen’s “spend our way to prosperity” zeal. If her nomination can’t be stopped, it will be good if Paul can at least use her nomination to advance an audit-the-Fed bill.

When the judgment day on this quantitative easing madness comes around at last, a thorough audit of the Fed will at least let us know where all the bodies are buried.

Doug Davenport

It is almost comical watching stocks soaring into the stratosphere, negating one negative technical warning after another, and reaching levels that defy rational thinking. Yet here we are.

The investing world has been perfectly conditioned by the central bankers to buy every single dip, throw caution to the wind, make the word “risk” archaic, and continue to shove stocks higher and higher with no end in sight.

And that brings us to Janet Yellen, who delivers the opening statement for her confirmation hearing on Capitol Hill today.

The U.S. dollar is trading strongly, having erased all of its overnight losses.

When her prepared comments were released Wednesday afternoon, stocks soared and the dollar collapsed as it became clear that she won’t be acting out of character just to appease her critics.

Yellen will stick to her views that monetary policy needs to remain accommodative because unemployment is high, the output gap large and inflation expected to run below the Fed’s 2% target for some time.

This week’s initial jobs data announced this morning shows a continuation and modest acceleration in the rate of improvement in the labor market. Recent GDP numbers back that up.

The net of it is that the labor market continues to gain momentum, and this should, on the margins, push up tapering expectations and push up the long end of the yield curve.

Yellen has long been criticized for being soft on inflation, but, with high unemployment, she can soundly argue that jobs come first.

Sen. Rand Paul has threatened to hold back the nomination, but with 45 other Republicans present, her confirmation is expected to be smooth, with few politicians willing to block the confirmation of the first female central bank chair.

Maybe we will see 1,800 in the S&P 500 before the month is out. Who knows?

I am bewildered that so many otherwise intelligent individuals see nothing wrong with a near-permanent money-creation scheme, and I am saddened that so many can be herded into something that has no rational basis.

Mike Larson

I listened to Janet Yellen talk for a couple of hours today, and my impression is that she basically talked like a Ben Bernanke clone.

She said the economy has improved, but not enough to consider tapering QE yet. She admitted stocks and other asset values (like real estate) are up, but didn’t think they were in bubble territory yet. She said she would rather use regulatory and other tools to deflate asset bubbles, but won’t refrain from using monetary policy to do so if necessary. I don’t see a lot of surprises in what she’s said.

So what is the market missing? Well, I think it’s not appreciating the fact that what the Fed does now is entirely “data dependent.” The Fed is no longer on autopilot with policy, a fact Yellen herself mentioned in the testimony. The central bank can’t give certainty about how long rates will stay low and how much money it will print because it doesn’t know! That’s the real problem here.

At turning points for the economy and interest rates, whether from down-to-up or up-to-down, the Fed tends to screw it up. It doesn’t anticipate the turn quickly enough, fails to listen to what the free market is saying, overpromises to keep policy easy/tight, and then has to make quick adjustments on the fly.

Why is that so important now? Because every single piece of economic data signals that the crisis of 2008 is long behind us. Data on manufacturing, retail sales, job growth, jobless claims and more point to a post-crisis environment. Yet Fed policymakers like Yellen aren’t reacting the way they should. Bond markets, on the other hand, are doing their job … the same job they’ve done for decades. They are selling off in price, sending yields higher, despite the Fed’s protestations because they know what is coming. The Fed is going to get this major turn — the turn that we saw the first leg of starting in May — wrong.

Don’t let Yellen’s comments fool you. The data already suggest the Fed is too far out on the policy curve, and when it has to shift again — just like it started to do in May — you’re going to see a second round of major fireworks.

Best wishes,

The Money and Markets Team