November 15, 2013


What Yellen would mean for Canada

Expected continued low interest rates and fast money printing would bode well for housing


Last week a meek-looking, grey-haired lady testified before the US Congress, in a bid to become the next chairman of the Federal Reserve Board. If confirmed, Janet Yellen would become the world’s powerful woman, with far greater clout than either German chancellor Angela Merkle or Sonia Ghandi, leader of India’s Congress Party.


Although hardly anyone outside of tight economic circles knows who Yellen is, her perch at the head of the US central bank, would give her power to guide interest rates, the money supply, regulatory policies and more. Her indirect reach would extend even to the Canadian housing sector, which should benefit from upwards pressures stemming from Yellen’s reputation as a “dove,” who will continue asset inflation policies initiated by predecessors Ben Bernanke, and Alan Greenspan.


These include a near-zero policy interest rate, coupled with nearly a trillion dollars a year in bond purchases, which are meant to stimulate economic growth through the “wealth effect.” The thinking is that if people feel richer because their stocks and house prices are rising, they will spend more, which should create jobs in the businesses that produce goods and services.


Job creation and the economy look good

Loose US money has been struggling to make its presence felt, a trend which continued during the past several weeks. In Canada job creation proceeded at a steady pace during October according to Statistics Canada’s Labour Force Survey. Employment rose by 13,200 posts, though the unemployment rate remained unchanged at 6.9 percent. The United States created 204,000 jobs during the month, with the unemployment rate coming in at 7.3 percent. Yellen’s testimony, which drew almost unanimous plaudits from all quarters, gave strong indications that she will try to make sure that trend continues.


That said, seasoned political watchers will have noticed two disquieting things about Yellen’s Congressional performance. The first relates to her comment that the Fed was not a “prisoner of the markets,” which she made when explaining why the central bank backed away from previous indications that it would begin to trim its money printing.


Those “tapering” hints by Ben Bernanke, the current Fed chair, caused equity markets to tank and long-term bond yields to spike by almost one percent. Stock markets, however, quickly shot up to record highs, after the Fed backed away from its stance.


In hockey, the surest sign that a coach is about to be fired, comes when a general manager assures everybody his job is safe. In a similar vein, Yellen’s comments regarding the Fed’s relationship with markets, have refocused attention on just often the weakened central bank, which is gradually running out of tools to breathe life into the economy, is increasingly forced to follow, as opposed to lead events. 


The second worrying signal can be clearly seen if you watch Yellen’s testimony ( with the sound off.


Experts say that 90 percent of communication is non-verbal. That means watching a person’s body language tells you more than what they are actually saying.  In Yellen’s case, what comes across is a poised, intelligent and extremely competent individual – that is, until you look at her eyes, which look like those of a deer caught in the headlights.


Market players are hoping that Yellen’s nervousness relates to the pressures of her testimony, not to worries she may have as to whether she is up to the job.







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