Fed's Yellen Tacitly Admits Economy Still Stinks

Fed's Yellen Tacitly Admits Economy Still Stinks
May 8, 2014

Robert Romano

Robert Romano is the senior editor of Americans for Limited Government. (read full bio)

“In light of the considerable degree of slack that remains in labor markets and the continuation of inflation below the Committee’s 2 percent objective, a high degree of monetary accommodation remains warranted.”

That was Federal Reserve Chairwoman Janet Yellen testifying before the Joint Economic Committee on May 7.

The message? The economy is still weak, with poor labor market conditions and no growth in the first quarter. And so the central bank’s near-zero interest rate and quantitative easing policies — which have already been in place for more than five years — are here to stay. For now.

So much for “tapering,” for which Yellen provided no timeline. Yellen said, “even as the Committee reduces the pace of its purchases of longer-term securities, it is still adding to its holdings, and those sizable holdings continue to put significant downward pressure on longer-term interest rates, support mortgage markets, and contribute to favorable conditions in broader financial markets.”

$55 Billion a Month

Specifically, the Fed is currently adding $55 billion to its balance sheet every single month. That’s still at a pace of $660 billion of expansion annually. The Fed balance sheet has grown by $3.4 trillion since August 2007 when the financial crisis began.

All those purchases have appeared to keep interest rates lower than they otherwise might be, by artificially boosting demand for U.S. government debt. Ten-year Treasury bonds stand at about 2.6 percent, with plenty of room for further interest rate drops.

As for the Fed-set Federal Funds Rate, that will remain near zero for the foreseeable future: “We anticipate that even after employment and inflation are near mandate-consistent levels, economic and financial conditions may, for some time, warrant keeping the target federal funds rate below levels that the Committee views as normal in the longer run,” Yellen said.

Meaning that even long after unemployment drops below 6 percent, and inflation is at the Fed’s 2 percent target — the central bank intends to keep the spigots open. It’s a recipe for QE4-ever, and one that will always have a ready-made excuse to continue when this or that data point looks negative.

Housing Worries

This time, Yellen cited concern with the fragile recovery in housing, saying, “the recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery.”

That, despite $1.6 trillion of Fed purchases of mortgage-backed securities from banks that bet poorly on housing in the bubble, Congress placing Fannie Mae and Freddie Mac in conservatorship, and the enactment of the Troubled Asset Relief Program (TARP).

But what the heck? Maybe $1.6 trillion was not enough. A few hundred more billion, that ought to do it, right?

Or, maybe the Fed’s asset purchases have nothing at all to do with a robust market for housing. Perhaps the reason housing is cooling is because unemployment is still too high, labor participation is sliding, incomes are stagnant, and Americans are still crushed under the weight of too much debt. In short, there are fewer people out there buying houses, so demand is low.

How would the Fed buying up more mortgage-backed securities or reducing interest rates by a few basis points change that? They wouldn’t.

Yet Yellen and the Fed will continue to pretend the programs are designed to perform such miracles. It’s all alchemy.

Until the U.S. competes on a global level by reducing the cost of doing business here, slashing taxes, regulations, and strengthening the dollar— and stops bailing everyone out, thus preventing markets from finding their bottom — the recovery will remain nebulous. No amount of pump priming is going to change that.

Originally published at NetRightDaily.com.

Robert Romano

Robert Romano is the senior editor of Americans for Limited Government. (read full bio)