During her initial congressional testimony as chairwoman of the Federal Reserve last week, Janet Yellen stated that she “expects a great deal of continuity in the [Fed’s] approach to monetary policy.”
This essentially translates to the continuation of “quantitative easing” — the Fed’s buying up of securities and assets to put more money into the financial system.
It’s thought that pumping money into the economy through quantitative easing stimulates it. In other words, it’s reasoned that more dollars circulating means that people will demand more, prices will go up and jobs will be created.
Additionally, Yellen told Congress the Fed would also likely keep interest rates at near-zero levels — at least until the unemployment rate dips below 6.5 percent.
Unfortunately, such an approach has consequences. And it would be nice to see more skepticism rather than celebration about Yellen’s projections
The Federal Reserve has often tried to hasten post-recession economic recovery by manipulating asset prices. Monetary and fiscal policy at the Fed and the federal government, respectively, helped create the dot-com boom when stock valuations and Internet stock prices became inflated through exuberance and such haphazard decision-making. The Fed also waited too late when putting the brakes on the money flowing into capital markets in the late 90s, a mistake that fueled speculation.
Once the ramifications of the bursting bubble on Wall Street hit Main Street, then easy money became the tool to “lift the economy” out of recession.
The Federal Reserve also kept rates low and even encouraged speculation in the housing market. This actually helped cause the recession of 2008-2009.
Fast-forwarding to the present, is there any reason to believe this phenomenon will not happen again under Yellen?
The value of the S&P 500 has exploded, with a 170 percent increase since it hit its rock bottom on March 2, 2009. Over the same period, unemployment moved from 8.7 percent to a high of 10 percent and is now down to 6.6 percent. And the gross domestic product has only grown 20 percent since that time, from $14.4 trillion to $17.1 trillion.
But the most compelling indicator that America could be on the verge of another bursting bubble is the reaction to Yellen’s testimony. The stock market rose 200 points that day. One cannot help but question why Yellen’s testimony — which discussed the need for “continuity” in stimulus measures — would cause stocks to soar.