What Janet Yellen did/didn’t say yesterday

Yesterday the Fed announced that its Open Market Committee had decided to postpone, yet again, beginning to raise interest rates from their current intensive-care lows.

In her press conference following the decision, Jane Yellen cited several reasons :  the recent rise in the dollar, a plateauing of consumer spending in the US and worries that the authorities in China might be bungling their way through the necessary change in that economy from export-led growth to one that’s led by domestic demand.  (Ms. Yellen pointed to recent ructions in the Shanghai and Shenzhen stock markets as evidence for the last.  Personally, I don’t think this is correct.  I see those markets’ rise and fall as what almost inevitably happens when a country allows margin borrowing for the first time.)

Whatever the motivations, the fact remains that the Fed sees the current situation in the US as too risky to warrant even a miniscule rise in short-term interest rates.  …and this is despite six years of economic growth and increasing employment since the economy bottomed in 2009.

What isn’t being said here?

Two things, I think:

–after Japan’s financial collapse in 1989-90, that country twice tightened economic policy prematurely–once by raising interest rates, a second by raising taxes.  The result of these miscues was a quarter-century of deflation and economic stagnation.  The Japan example suggests that in a slow growth environment with no inflation the risks of policy tightening are much larger than most people in the US suspect.

–governments have two main tools to influence GDP growth:  monetary (changes in the price or availability of credit) and fiscal policy (changes in spending and/or taxes).  Fiscal acts slowly but lays the general foundation for growth and indicates a broad direction for expansion.  Monetary acts relatively quickly and is most useful for mid-course corrections, slowing or accelerating the pace.  A dysfunctional Washington has meant that, other than the bitterly contested bank bailout plan in 2009, fiscal policy has done virtually nothing useful to stimulate growth over the past half-decade (arguably, it’s a mild deterrent).  Nor is it likely that Congress, now winding up to shut the government down, will change its stripes.  This implies that the Fed has no backstop if it makes a policy mistake.

 

Nothing about either is particularly new news.  But the Fed decision calls attention the major structural difficulties the US economy faces.  This is not a recipe for having stocks go up.

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