Janet Yellen was sworn in yesterday as the fifteenth chair and first woman to head the Federal Reserve. She replaced Ben Bernanke, who presided over his final session during last week’s meeting of the Federal Open Market Committee (FOMC). The Fed announced after that meeting that it would once again taper its monthly asset purchases. Yellen’s installation and the continuation of tapering indicate that Bernanke’s retirement is not the end of an era or an unprecedented turn, but rather business as usual at the central bank.
At the Fed’s January 28-29 meeting, the FOMC announced that it will reduce the scale of quantitative easing. The reduction in asset purchases is $10 billion, bringing the monthly total down from $75 billion to $65 billion. The last reduction was announced during the Fed’s December meeting in 2013, and markets reacted positively. This announcement, however, came on the heels of a bad week for equity markets.
In spite of the very recent equity selloff, the Fed seemed bullish about the economy in general, citing improvement in labor markets which were mostly likely buoyed not by recent job numbers, which the Fed deemed “elevated,” but rather household spending and business investment. Detailed minutes of the recent meeting will be released in mid-February, doubtlessly leaving Fed watchers on pins and needles for the next few weeks, but some details can be gleaned from the official statement released by the FOMC. The Fed indicated that if its current bullish outlook on employment is confirmed, it “will likely reduce the pace of asset purchases in further measured steps at future meetings.” The board did suggest that “asset purchases are not on a preset course,” leaving open the possibility that tapering might halt on an economic downturn.
New Chairwoman Yellen, sworn in by Ben Bernanke at the Federal Reserve headquarters near Foggy Bottom, promises to bring her neo-Keynesian philosophy to play during her term. During her confirmation period she hinted that she would be amenable to more aggressive regulatory policies from the central bank, frequently repeating a call for increased reserve requirements. During one particularly revealing FOMC meeting back in the early 90s, Yellen revealed her personal philosophy toward central banking:
I began by asking myself the question, what is it that the public cares about? The answer seems straightforward to me. It is not just high and variable inflation...The public also cares about real outcomes. Households and businesses very much dislike fluctuations in output and employment, for good reasons. Quite naturally, they prefer higher average output and lower average unemployment. I consider these goals eminently sensible, not foolish nor irrational. ...
It seems to me the record shows that within limits, tuning works even if it is not "fine."
Fortunately, the goals of price stability and output stability are often in harmony, but when the goals conflict and it comes to calling for tough trade-offs, to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.
Compare Yellen’s comments back then with the FOMC statement from last week:
[T]he Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent...
The Committee continues to anticipate...that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal.
Sound familiar? It should be obvious who’s running the show. Let’s close with a quote from Keynes himself:
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. ...As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
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