Mark Carney’s new American counterpart was also in action this week. Janet Yellen, the first woman to head the Federal Reserve, updated the markets on the central bank’s assessment of the economy. She repeated her predecessor Ben Bernanke’s assurance that interest rates will stay near zero until “well past the time” that the unemployment rate drops below 6.5%.
The Fed previously said it would consider raising interest rates once the rate falls below 6.5%; it is now 6.6%. She will also continue gradually reducing the monthly size of the Fed’s money-printing programme.
What the commentators said
Yellen made an excellent start for markets, said FT.com. The S&P 500 gained almost 1% after she spoke. She played down concerns that the US economy had hit a soft patch, as implied by the last two poor employment reports, but also “underlined a determination” to keep bolstering an economy that hasn’t managed 3% growth since the financial crisis.
By confirming the Fed’s shift of focus away from the headline unemployment rate of 6.5%, she “reassured markets” that she was as dovish as they expected, said the FT’s James Mackintosh. With inflation currently low, investors think Yellen can stay dovish “even as economic growth delivers higher earnings and keeps the bears away”.
But investors should note that practically everyone is expecting this ‘Goldilocks’ scenario. The gap between the highest and lowest growth forecasts is down to levels last seen at the height of the credit bubble in 2007. So if non-inflationary growth doesn’t materialise, the scope for an “upset” in the markets is considerable.
An upset is practically guaranteed, as GMO’s Jeremy Grantham pointed out. Yellen is part of the Fed tradition of serial bubble-blowing that started with Greenspan and has caused such damage over the past two decades. “It is a totally failed experiment, with enormous pain.” The bubble is blowing up right now and the next bust may not be far away. “Will they never learn?”