Saturday, December 13, 2014

"Janet Yellen Has Been Keeping Some Strange Company Recently"

The above headline originally appeared at a Daily Caller post where Steve Lonegan correctly notes:

In her first major appearance in Chicago back in March Yellen donned a welding mask on a trip to a trade school in the southwest area of the City. In her speech she mentioned the stories of three specific long-term unemployed workers, two of whom just happened to have spent time in jail. A Fed spokesperson confirmed that Yellen had met each and knew of the individuals’ pasts before the speech....

More recently, Ms. Yellen has waded into the hot political topic of income inequality. Speaking at a Boston Fed conference, she not only expressed concern for income inequality, but stated that “social safety-net spending” and “public funding of education” are ways “those governments can help offset the advantages of some households.” Such statements could be interpreted as endorsing income redistribution.  Moreover, that speech was preceded the day before by a visit restricted to a low-income neighborhood of Boston.

As if that were not questionable enough, the speech was followed by an unusual meeting with what reported were “labor and community organizers.” It even included one person from Ferguson, Missouri, the black community near St. Louis that has media focused on the politically charged issue of racial inequality.
Obviously, it is a major stretch to think that these obvious lefty talking points should be the core focus of the Fed chair.

I am beginning to more and more think that Yellen is really a front person for a monetary policy that is really being run by Fed vice-chairman Stanley Fischer, who is only vice-chairman, and not chairman, because of his dual Israeli citizenship and the fact that he ran the central bank of Israel. The calculation must have been that he wouldn't get Senate confirmation.

That said, his speeches are consistently on monetary policy topics. And. oh yeah, he is a mad money printer. I reported at the EPJ Daily Alert on December 3:

With the U.S. economy making progress, the focal point at the Federal Reserve these days is how and when best to lift interest rates from zero, Fed vice chairman Stanley Fischers vice chairman said yesterday at a conference..

“Zero interest rates is not normal,” said  Fischer at the WSJ CEO conference. “The big issues we’re discussing now is lift off of interest rates — when is that going to happen, how is it going to be done.”

Fischer said he believes the U.S. economy has seen a “real recovery” with growth fluctuating in the 2% to 2.5% range. He added he thinks years of low interest rates have worked to help the current recovery and generate at least some inflation.

But he is clearly a major money printer

Fischer said that if inflation fails to take hold, the Fed will need to leave rates at their current low levels, delaying liftoff from the near-zero rates.

In other words, Fischer is pretty much guaranteeing the Fed will print and print until price inflation kicks in.

And on November 26, I wrote in the ALERT:

Indeed, I don't believe most observers of the US economy understand just how inflationsit the current Fed is. While Fed chair Janet Yellen heads the Fed, I believe the key monetary policy themes are set by the Fed vice-chair Stanley Fischer. While Yellen is out on the road giving speeches on the gap between rich and poor, women's work rights, Fischer is focusing on monetary policy and his thinking is very scary.

Yesterday, at EPJ, I highlighted some of his thinking in my post: Is Milton Friedman the Direct Cause of the Current Crazed Fed "Inflation Targeting"?

What I didn't put in that post and what you need to know is that, in his IMF book , Fischer backs up this notion of ignoring short-term price inflation and looking at things from a longer perspective. He used Bank of England actions as an example:

"[E]xperinece has persuaded me that the Bank of England's approach of targeting the inflation rate two years out is probably the best way of dealing with the tradeoff [between inflation and output]. It allows the bank to take into account the short-run impacts of monetary policy on output while ensuring that the longer-run effects of monetary policy on inflation are kept-center stage."

This falls in line with my view that although the Fed's stated price inflation target is 2%, in reality it is 3%, since they will attribute any move between 2% and 3% as merely noise---and not a problem over a two year perspective. What they completely don't seem to take into consideration is that once price inflation starts to climb, it could accelerate very quickly. I can easily see a climb to the 5% level before the Fed realizes it needs to be serious about fighting price inflation, but at that point their response will be too weak and we will have a tiger by the tail situation: higher inflation, higher rates and even higher inflation.

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