Tomorrow Friday, August 25, 2017, Janet Yellen will have a speech at the central bank’s annual conference in Jackson Hole, Wyoming. Some market participants say it might be her last but historic speech and the end of an outstanding decade in the FED history. Her term will be finished in Feb. 2018, and there is no indication by Trump administration that she will stay.
Dr. Yellen became the President of FED Bank of San Francisco since 2004, selected as the vice chair of the Board of Governors in 2010. She was one of the architects of the recovery plan and when appointed as a chair of FED for four years term in Feb. 2014, she was fully aware of the state of the economy and had a clear and predefined agenda to lead the central bank.
She is a confident assertive “New-Keynesians” economist with a strong background and impressive resume. I wrote her biography in the Persian language printed in Tehran- “Donye-Eghtesad” newspaper in Jan. 2014.As she announced from the start, she gave priority to labor market over price stability and maintained an open, transparent, and flexible approach leading the monetary policies. She has been able to improve the labor market and keep the interest rate under 2% which is the target rate.
In January 2009, the banking supervision committee (BASEL) reported the result of its research on the roots and causes to 2008 financial crisis to G20 financial and banking authorize along with 17 recommendations to do for a sustainable and healthy global system. This historical report showed that the human greed did not let the supply/demand approach work properly as it claims on paper. The report was basically saying that all three sections of financial industry namely Banking, Insurance, and Securities had been taking advantage of the grey areas and flaws of old and obsolete twentieth century regulations and deregulations in early years of 2000, and in some areas, lack of rules for new financial products such as Credit Default Swaps, and Hedge Funds.
Making the long story short, FED has implemented the” “BASEL III” recommendations and successfully upgraded and strengthened the US financial and banking system during the last few years and could survive the tough economic situations. Today the state of growing economy is steady and sustainable. The unemployment rate is 4.3% down from 6.7% when she started, and the core inflation rate is around 1.7% while all indicators show that the economy is growing moderately and continuously. Yellen has led the FED to the best of its performance and transparency during the last four years. FOMC has been willingly explaining its decisions on monetary policy to the public in every meeting and opportunity openly and clearly, believing that the well-informed public could make better decisions and indirectly help to lessen the economic uncertainties. ,
The FOMC in its last minutes has stated that following the assessment of current conditions, inflation, employment and the future outlook, they have decided to keep the rate unchanged (1% -1.25%). They also said that the monetary policy would remain accommodative for more improvement in labor market and return to 2% sustainable inflation rate. They have decided to keep the funds' rate unchanged while they are watching the state of inflation closely and ready to raise if necessary.
However, Dr. Yellen has an “Unfinished Business”. Following the October 2008 decision to buy the bad loans from the banks and financial institutions and agencies, FED started injecting money and credit to financial institutions and banks by many unconventional tools such as paying interest on bank reserves, buying their bad loans and securities so that the financial industry gets back to its normal daily activities. In other words, FED took the bullets for the financial industry and bought around 3.5 trillion of their bad assets during 2009 to 2014 for cash and put these bad long term assets into its own balance sheet. Today the FED balance sheet has 4.5 trillion of assets that is said to be reduced to 2.5 trillion. Who is going to reduce these bad assets in FED and how is it going to be implemented in a way to have the least impact on the economy, inflation and labor market?
FOMC is going to clarify about its balance sheet normalization plan which means reducing the securities assets for 2 trillion dollars gradually.In order to reduce the balance sheet assets, FED has to decrease its accommodative and reinvestment policies which will tighten the economic activities and act like raising the interest rate. So, FED might utilize the process of unwinding the balance sheet as a tool to keep the inflation close to 2% target.
While some analysts say that the central bank balance sheet will be reduced gradually and it will not have an impact on the economy. But many investors reasoning differently, saying that when the FED stops purchasing securities, the demand decreases due to the absence of the main buyer.The architects of recovery process who have inflated the FED balance sheet purposefully to save the economy have surely a plan for “unwinding the Balance sheet” as the last step of the exit strategy.
Yellen has been involved in FOMC monetary policies since 2004 and is one of the main architects of monetary policies during the crisis and recovery for the last 10 years. So, she might be the best economist to finish the job and normalize the FED balance sheet as the last step of recovery or exit strategy with no harm to the state of the economy.
Trump has a list of people who might be willing to take her place such as Gary Cohn his lead economic advisor and others, but he seems to be happy that Yellen has kept the interest rate low and is focused on the labor market.
However, this is a two-way street and Dr. Yellen might not be interested to serve for another term. Because she might not be comfortable with deregulations and other Trumps’ financial agenda, besides she is aware of the tax reform consequences and its huge impacts on fiscal and monetary policy and the economy in general. So if she does not serve for another term for any reason, then the FOMC committee will have 5 trump appointees in 2018 who might change the path of current monitor policies in favor of free market theories.
Tomorrow she will have a speech about financial stability and many expect to hear about her concerns and outlook about the state of the economy in 2018 and afterward.
So if there is going to be a new FED chair in place, then it better be a right choice, otherwise US economy will be seriously at stake in the mid term and ready for another collapse. The end.
