Tuesday, August 19, 2014

'Fairy Godmother' Will Speak on Friday
Investors may be looking forward to Fed Chair Janet Yellen’s speech at Jackson Hole on Friday. I’ve often affectionately called her the “Fairy Godmother of the Bull Market.” Stock prices tend to rise after she speaks about the economy and monetary policy. That happened often when she was a Fed governor, and has continued now that she is Fed chair.

A few Fed watchers are speculating that the upcoming speech would be a good opportunity for Yellen to signal that she is ready to normalize monetary policy, i.e., hike the federal funds rate. So they are expecting a hawkish speech. I disagree. In a June 30, 2009 speech, Yellen said that the lesson of history, particularly of the Great Depression, is that premature monetary tightening can be disastrous:
If anything, I’m more concerned that we will be tempted to tighten policy too soon, thereby aborting recovery. That’s just what happened in 1936 when, following two years of robust recovery, the Fed tightened policy because it was worried about large quantities of excess reserves in the banking system. The result? In 1937, the economy plunged back into a deep recession. Japan too learned that hard lesson in the 1990s, when both monetary and fiscal policies were tightened in the mistaken belief that the economy was rebounding.

These episodes teach us a valuable lesson that we should heed in the present situation. Let this not be another 1937, but a time when policymakers have the wisdom and patience to nurse the economy back to health. And, when the economy does come back, let it be built on a foundation of sound private investment and sustainable public policies. Only then can we be confident that we can escape destructive boom-and-bust cycles and build a more permanent prosperity. Thank you very much.
Thank you, Fairy Godmother!
(Based on an excerpt from YRI Morning Briefing)

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.