Janet Yellen’s next move

Ouzilly, France

Everybody is under pressure here. Elizabeth has planned a big party to welcome daughter Sophia and her husband, Ryan, into the local French community. Two hundred people are scheduled to gather on the lawn.

But what’s this? We just checked the weather forecast; it’s supposed to rain!

Too late to get a tent. Too late to call it off. Oh la la.

“Everything is so nice here,” says our mother, clearly not paying attention. “It’s perfect.”

The family is gathering. This is where the younger children grew up. It is the place they regard as home. Which is a bit strange to their father, who never expected to stay for more than a few years and has never really felt at home here.

But we’ve now been here, off and on, for nearly two decades. And it looks like more will follow.

That’s both the trouble and the charm of life – you never know exactly where it will lead you.

On Friday, the Dow gave up another 69 points, after dropping more than 300 the day before. Gold recovered $12. More alarming is that the price of oil is dropping – even with the problems in Russia and Palestine. This suggests the global economy is slowing. And in the US, the homebuilders are crashing, probably in anticipation of higher mortgage rates.

Janet Yellen is being pushed into a corner by her own pronunciamientos. That is, she has threatened to raise interest rates – back to ‘normal’ – when inflation and employment targets are hit.

And hit they have been. So what’s she gonna do?

Our guess is that she means what she says. She is a smart woman. But she is not smart enough to see that she has been talking claptrap, and not courageous enough to admit that her whole career is built on it.

“People come to think what they must think when they must think it,” is one of our signature dicta.

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In order to become a major establishment economist, Janet Yellen had to think that well-meaning, well-educated officials could improve the performance of a market system. She could be a monetarist, or a Keynesian.

There were many different strains of thought that are acceptable. But she had to be some type of activist, she had to be a True Believer in the power of intervention.

And as Numero Uno at the Fed, she must believe, too, that her policies have prevented a depression and have helped the economy recover.

As lunatic as it sounds, she now believes that she guides the US economy, and indirectly, the entire economy of planet earth, to a stability and growth that it could not achieve on its own.

A heavy responsibility, no doubt. She probably hedges it with the further belief that an economy – like a surly teenager – does not always cooperate. It doesn’t always do what it ought to do when it ought to do it.

Sometimes it even sulks, and often, it fails to get out of bed in morning. So, if it doesn’t meet expectations, it’s not her fault!

Now, she must think she’s got things headed in the right direction. Her role is to make sure that it doesn’t get off track. If she sees any sign that the ‘recovery’ has been put in danger by her attempts to ‘normalise’ interest rates, she will back up.

That is the history of the last seven years, and it is probably the best guide to the months ahead.

Almost surely, the withdrawal of QE will be accompanied by anxiety and volatility. As economist Richard Duncan points out, the net liquidity that has been driving up asset prices, month after month, is now drying up. In other words, the financial world is used to getting a big allowance, with no strings attached. Take it away and there are bound to be tantrums.

Ms Yellen will not panic at Friday’s 300-point drop in the Dow. But if the drops continue, and if new data show the recovery is not as mature as she had thought, then, she will back off.

She will give in. The allowance will be re-instated.

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