Opinion

Anatole Kaletsky

Janet Yellen’s moment

Anatole Kaletsky
Mar 18, 2014 15:37 UTC

When Janet Yellen chairs her first meeting of the Federal Open Market Committee Tuesday and Wednesday, she will be presented with a once-in-a-generation opportunity that even her predecessors in the world’s most powerful economic position have rarely enjoyed.

Not only can Yellen alter the guidance on interest rates with which the FOMC has been steering global financial markets. Beyond that she could do something far more profound and exciting: transform an entire generation’s way of thinking about economics, market forces and the role of government in achieving and maintaining prosperity.

To start with the obvious, Yellen will almost certainly change or simply abolish the unemployment “threshold” of 6.5 percent announced early last year as a reference point for the FOMC to start considering the possibility of higher interest rates — perhaps setting a threshold of 5 percent or so. More radically, she could supplement the objective of lower unemployment with a range of other indicators that will need to improve before the Federal Reserve even considers any monetary tightening: for example, accelerating gross domestic product growth; strengthening productivity trends and eliminating the excess capacity in many industries that is now discouraging investment, hiring and productivity growth, as well as holding down corporate pricing power.

This potential broadening of the range of monetary objectives suggests the really radical possibilities opened up by Yellen’s leadership of the Fed. Might she announce, for example, that as the economy recovers, the Fed will ignore accelerating inflation and focus entirely on promoting maximum employment, unless and until inflation exceeds some truly uncomfortable level such as 3 or 4 percent? Will she follow up on some of the work done within the Fed, suggesting that expansionary monetary policy can act not just as a cyclical stimulus, but could also improve supply-side conditions and long-term productivity growth?

Might she even suggest that, if the economy requires further monetary stimulus in future, Quantitative Easing could be coordinated with fiscal policy? For example, the Fed could print “helicopter money” for the government to “drop” directly on to the public via citizen dividends or per capita tax rebates.

A central banker’s ‘license to lie’

Anatole Kaletsky
Jan 30, 2014 21:43 UTC

Federal Reserve Chairman Ben Bernanke, who retires this week as the world’s most powerful central banker, cannot be trusted.

Neither can Janet Yellen, who will succeed him this weekend at the Federal Reserve.

And neither can Mark Carney, governor of the Bank of England; Mario Draghi, president of the European Central Bank, or any of their counterparts at the central banks of Turkey, Argentina, Ukraine and so on.

The end of the Fed’s taper tantrum

Anatole Kaletsky
Nov 21, 2013 15:03 UTC

Following Wednesday’s publication of the Federal Open Market Committee minutes, we now know that a reduction in U.S. monetary stimulus could be on the agenda for the next FOMC meeting on December 19. How much does this matter?

When the Fed unexpectedly decided not to “taper” in September, the markets were stunned and gyrated wildly, although investors had only themselves to blame for being wrong-footed in this way. Ben Bernanke had made crystal clear his reluctance to reduce monetary stimulus as long as the U.S. economy appeared to be weakening, which appeared to be the case throughout the summer. By December 19, the situation may well be very different, since the economy will probably be improving and the U.S. fiscal stalemate may well have been resolved. If such improvements happen, the Fed will have no compunctions about wrong-footing investors again, in the opposite direction, as this column suggested last month.

So what will be the impact on the world economy and financial markets if the Fed decided to taper as early as December? The answer is, not much. As long as the Fed stands by its commitment to keep interest rates near zero for the foreseeable future, tapering will have no major economic impact. Therefore its financial significance should also be marginal, except insofar as investor psychology overwhelms rational economic analysis.

Central bank stimulus is here to stay, but what if it fails?

Anatole Kaletsky
Nov 14, 2013 16:29 UTC

If anyone still doubted that central bankers all over the world will keep interest rates at rock-bottom levels, those doubts should have been dispelled this week. Janet Yellen’s statement on Thursday to the U.S. Senate that the Fed has “more work to do” to stimulate employment, and that “supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” capped a series of surprisingly clear commitments to easy money from central bankers this week. On Wednesday Joerg Asmussen, a member of the executive board of the European Central Bank, and Ewald Nowotny, the Austrian central bank governor — both of whom had previously been reported as voting against last week’s surprise ECB rate cut — said that they might in fact support further rate cuts and even negative interest rates, as well as the possibility of breaking the taboo against U.S.-style purchases of government bonds. And Mark Carney, the Governor of the Bank of England, reiterated more strongly than ever that any early increase in British interest rates was out of the question, despite the fact that the outlook for the British economy has turned out to be much better than the BoE had expected.

But what if these zero interest rate policies produce disappointing results in the year ahead, as they have in each of the past four years? What if the world economy fails to spring back to life or just plods along with sub-par growth, despite all this stimulus, as has happened in each of the past four years?

With luck, these questions will not need answering because fiscal austerity has acted as a powerful headwind to economic recovery in the U.S., Europe and Britain and these budget consolidation efforts are now being relaxed. The new records on Wall Street and other stock markets suggest growing confidence among investors that monetary stimulus will finally deliver decent levels of growth next year — and this does indeed seem likely. But what if the optimism turns out to be wrong? What if the U.S. and Britain fail to grow by at least 3 percent next year, and what if Europe stays stuck with sub-1 percent growth and mass unemployment? In that case, the monetary and fiscal policy experiments since the Lehman crisis would have to be judged as failures — and that judgment would open the way to much more radical ideas than zero interest rates and QE. Such radical ideas would be of two opposing types.

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