EKIP– Expert Club for Economics and Politics A Different Opinion
The first meeting of the Federal Open Market Committee (FOMC) with the participation of the new Fed Chair Janet Yellen rather surprised the markets with Yellen's statement that within six months (i.e., March 2015 at the earliest) after the end of the Fed's current bond-buying program, it may proceed with an increase in its key interest rate.
In addition, Yellen announced that the Fed has reduced its purchases of government and mortgage bonds by another $10 billion to $55 billion per month, and will no longer use the unemployment rate as a benchmark for determining its monetary policy, but will focus on a broader range of indicators, similar to the Bank of England.
The last two decisions, however, cannot be said to have been a big surprise for analysts. Hardly any expert believed that the moment the unemployment rate reached 6.5% (according to the latest data, unemployment was 6.7% in February) the Fed would start increasing its key interest rate, given the fact that this indicator alone does not give us a complete picture of what is happening in the labor market. Let's not forget that to a large extent the decline in unemployment in the past few years was the result of a shrinking labor force, and most newly created jobs in the US were part-time (mainly due to the impact of Obamacare on the relative labor costs of companies).
In fact, the US central bank has always used a wide range of indicators in its analysis of whether to change its monetary policy, it is just that now it has officially announced the fact. And yet, the change in the benchmark is proof that the Fed can continue printing dollars indefinitely, because there are no clearly defined and transparent criteria for when a change in central bank policy will occur.
But are the large group of economists and PhDs who work for the Fed aware at any given moment of the state of the American economy? Obviously not. In late February, the Fed released the minutes of its meetings held in early 2008 - a few months before the global economy fell into the worst economic crisis since the Great Depression. The documents make it clear that the Fed sees no danger of recession for the world's largest economy, not to mention the denial of the idea of a bubble in the real estate sector (in practice, largely a product of the central bank's own policies).
Given the Federal Reserve’s failure to predict the Great Recession months before it officially began, with the collapse of Lehman Brothers in September 2008, do we have any reason to believe that under Yellen’s auspices, the central bank will be able to accurately judge when the right moment is to change its monetary policy? Should we expect the Fed to start tightening quantitative easing in about a year’s time? It seems highly doubtful. The US economy has slowed in recent months, and the harsh winter has been blamed as the main culprit. While the bad weather has had a negative effect on economic activity, there are much more fundamental reasons to expect the negative trend to persist.
Economic activity in major emerging markets has begun to slow down significantly due to significant capital outflows over the past year. China is facing serious problems created by years of planned management by the communist regime in the country – especially in the banking sector and state-owned enterprises. Russia, Europe and the US continue to impose economic sanctions on each other, which will further reduce world trade. The situation in the European Union looks rosier than a year ago, but as we well know, things there can go downhill again very quickly, considering that debts at both the private and public levels are higher than at the beginning of the debt crisis on the Old Continent, and the necessary structural reforms are still missing. From all this, we can conclude that the Fed will not reduce the turnover of its printing press anytime soon, and interest rates will remain at levels close to zero for at least a few more years. An excellent prerequisite for new bubbles.
