Yellen Joins The Party

When then-President-Elect Joe Biden nominated Janet Yellen to be his Treasury secretary last month, the markets rejoiced. The former Federal Reserve chair was a known quantity, and investors hate uncertainty – they knew what they were getting. Even better, they liked what they were getting—a monetary dove who favors low-interest rates and supports an interventionist government and Fed. While she wouldn't be on the Fed in her new role, she still holds the same views.

Moreover, since she is Jerome Powell's immediate predecessor, and they both worked together on the Fed for several years, it was pretty much a given that the two will work closely and harmoniously together for the good of the country, as the times demand.

But the markets were also relieved that Biden did not bow to the so-called progressives on the extreme left of his party and pick someone more to their liking, instead choosing someone with safe, relatively moderate views that both parties could support – as indeed they did, by an 84-15 Senate vote. In other words, Biden wanted – and the markets demanded – an adult in the room, and that's what they got with Yellen.

Or did they? Continue reading "Yellen Joins The Party"

The Fed Warms To Climate Change

The politicization of the Federal Reserve continues apace. And no, President Trump isn’t trying to pull some grand last-minute gesture before he leaves office, like trying to fire Jerome Powell or something like that.

Last week, as expected, the Federal Reserve formally joined the Network of Central Banks and Supervisors for Greening the Financial System, the “lone holdout” among the world’s major central banks to join this “forum for central bankers and regulators to come together and discuss how their institutions can ensure their financial systems don’t worsen climate change risks, and how financial institutions might be able to lower those risks,” as the Wall Street Journal described it.

As innocuous as that may sound, it injects the Fed solidly in the middle of what has become increasingly political, namely which companies – and probably, individuals eventually– banks should or shouldn’t lend money or offer their services to.

As we know, several large international banks have been under increasing pressure from shareholder activists to stop making loans to companies in the “fossil fuels” business, namely oil and coal companies and pipeline operators, and the like. And the banks have dutifully buckled under, albeit with a long lead time as to when they will actually cease doing so. Now the Fed will be providing added pressure on the banks to make loans only to those companies favored by the Washington and New York elites – or at least will feel added pressure to do so. Continue reading "The Fed Warms To Climate Change"

Is Fed "Independence" Dead?

For the better part of the past four years, we've had to listen to the chattering classes defending the sanctity of the independence of the Federal Reserve. President Trump was routinely lambasted for constantly criticizing Jerome Powell, while several of his other nominees to the Fed, such as Herman Cain and Steven Moore, were deemed to be too cozy to Trump to warrant consideration. Both of them withdrew their nominations for other reasons, but it appeared that their nominations were DOA. For the same reason, the confirmation of the "controversial" Judy Shelton looks like it is going to die on the vine because she's been portrayed as Trump's lackey.

Yet now we have the prospect of Janet Yellen, the former chair of the Fed, being nominated as Joe Biden's Secretary of the Treasury. If nothing else, that will basically put the nail in the coffin of the notion of Fed independence. Does anyone seriously doubt that the Treasury and the Fed will be joined at the hip when the two most recent Fed chairs head those two agencies?

Yet that prospect probably won't be an impediment to her being confirmed by the Senate—on the contrary. The markets greeted Yellen's nomination with absolute euphoria, as well they should. The prospect of the Treasury and the Fed working more closely together in a time of crisis is certainly a reason for optimism. And it's certainly good for my portfolio, so I'm not complaining. But lost in all of the jubilation is that the idea of Fed independence has gone by the wayside, and nobody seems to give a hoot.

This is certainly not a bad thing. The whole idea of Fed independence was always suspect. The Fed is no more independent than the FBI or the Energy Department. It's just another branch of the government that arguably should always work in tandem with the Treasury for the betterment of the U.S. economy and usually does. Yet someone created this fiction that the Fed is somehow the moral equivalent of the Supreme Court and above politics. Continue reading "Is Fed "Independence" Dead?"

Federal Reserve: Trick or Treat

Want to guess who Federal Reserve Chairman Jerome Powell is going as for Halloween? Based on his most recent speech on the economy, it’s got to be the Grim Reaper.

Even as reports continue to show the economy recovering pretty quickly following the government-mandated shutdown of the spring and summer – which several of his Federal Reserve colleagues have cited – Powell continues to paint the direst picture of the American economy. However, this time, he has gone beyond the bounds of the Fed’s independence, publicly politicking for a new federal fiscal stimulus package. If one doesn’t arrive soon, he warned, it will be “tragic” and “lead to a weak recovery, creating unnecessary hardship.”

“The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods,” Powell said in a speech last week to the National Association for Business Economics.

I had been under the impression that the Fed was supposed to be “independent” of the government, or at least that’s what we were told repeatedly when President Trump went off on Powell for not doing what he wanted. However, it seems to be ok if Powell cedes that independence voluntarily and takes sides on a political debate.

This isn’t so much an example of charter creep, which just about every government agency and leader does, as much as a charter leap, with the Fed not only taking over more and more of the economy and financial markets but publicly lobbying for government action to make it so. Continue reading "Federal Reserve: Trick or Treat"

Do We Really Need More Stimulus?

As we speak, Republicans and Democrats are still wrestling over another coronavirus stimulus package. Everyone wants one, we’re told, and the economy needs one.

Don’t start spending that stimulus check just yet.

Despite what they claim, Democrats don’t really want a deal, no matter how big, at least not until after the election. Do you really believe that Nancy Pelosi and Chuck Schumer want to allow President Trump to play Santa Claus and send out $1,200 checks to American voters right before the election? Needless to say, the president would just love to have his name on those checks.

So don’t count on another stimulus package until after the election, if then. It’s a valid question of whether the country really needs another one. But never fear, the Federal Reserve will step in where Congress fears to tread.

At its September 15-16 monetary policy meeting – the last one before Election Day – the Fed updated and revised its prognosis upward for the U.S. economy, finally catching up with many other analysts and some of its own regional banks who are forecasting a much brighter picture than Fed Chair Jerome Powell and many other Fed officials have been painting over the past couple of months.

The Fed now expects U.S. economic growth to be negative 3.7% for this year, a big upgrade from its negative 6.5% projection in June. It also expects positive growth of 4.0% next year (down from 5.0%), 3.0% in 2022 and 2.5% in 2023. Regarding unemployment, it expects the jobless rate to fall to 7.6% this year from its June projection of 9.3%, declining further to 5.5% next year, 4.6% in 2022, and 4.0% – i.e., full employment – in 2023. Continue reading "Do We Really Need More Stimulus?"