Sprott Money


December 16, 2015


Is Janet Yellen sane?

The Federal Reserve chairman has a long history as an expansionist monetary policy dove. The US central bankís recent tightening is forcing investors to consider the possibility that Yellen has aspirations of competency.


Yesterdayís US Federal Reserve rate hike will facilitate the unwinding of egregious capital misallocations, which have accumulated during a decade of monetary policy, that was of questionable sanity, when looked at from a historical perspective. 


That move is thus forcing investors to consider the possibility that Janet Yellen, the central bankís chairman, who is widely regarded as a reflexive dove, actually knows what she is doing. That she has aspirations of competency.


Letís be fair here. Yellen inherited a terrible mess when she took over her new job early last year. Under her predecessor Ben Bernanke, the US central bank completed an unprecedented spree of money supply expansion and low interest rates which spurred the creation of vast asset bubbles.


Tightening began long ago

So on the surface todayís Fed rate hike represents a major policy shift. However the US central bank in fact began tightening soon after Yellen took office. Itís first phase was the tapering, and then the gradual ending of the $85 billion a month of Bernanke QE money printing.


Led by Yellen, the US central bank then proceeded to tighten monetary conditions even further, by halting forward guidance that it was providing in its policy statements.  By no longer guaranteeing that it would be ďpatient,Ē prior to raising interest rates, the Fed began the unwinding of some of the carry trades that had built up among investors who were borrowing short-term money and investing it on a long-term basis.


The halting of quantitative easing and the removal of forward guidance may seem like minor actions. However in an economy like the US, which relies on debt increases to support growth, the Yellen Fedís moves were significant. More so, because they took place in an environment, in which other major central banks, notably the ECB and Japan, continued their easy money policies.


Bubble economy has deep support

That said itís far too early to break out the champagne. Americaís bubble economy has deep roots. Even if Yellen wanted to allow it to deflate gradually, which is probably the best possible scenario at this point, she would be unlikely to be able to muster the support to allow this to happen. Itís far easier to print and give the appearance of prosperity than it is to innovate and to do the hard work that is necessary to create it.


Underneath Yellen the Federal Open Market Committee is packed with mathematicians who donít understand that the first rule of math is that you need your units of measurement to remain constant. That by constantly devaluing the dollar every year, it is impossible to adequately measure progress.


In short, while there are slivers of sanity in the recent Fed moves. It is far from certain that these will continue.  


Note: The views of the writer do not necessarily reflect those of Sprott Money News.


Photo idea: Yellen picture from the US Federal Reserve.







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