By Wolf Richter, editor of Wolf Street. Originally published at Wolf Street.
Starting in 2018, President Trump harangued and hammered Fed Chair Jerome Powell to end Quantitative Tightening and to cut interest rates, and Powell buckled and did his infamous “180.” And now suddenly – unless this gets walked backed again tomorrow – we’ve got the opposite. Treasury Secretary Janet Yellen said in an interview with Bloomberg News on Sunday that higher interest rates would “actually be a plus for society’s point of view and the Fed’s point of view.”
Under Fed Chair Yellen, the Fed hiked interest rates five times, starting in December 2015. Yellen departed in February 2018 as Trump had refused to reappoint her, and instead replaced her with Powell. At the time, the sixth rate-hike was already baked in for the March 2018 meeting. She is no stranger to rate hikes.
Now Yellen – presumably with the backing of President Biden – is supporting Powell on rate hikes, which is a dramatic shift from the prior administration.
The issue in the interview was inflation and whether or not it would be fired up further by the federal government’s $4 trillion additional spending spread over 10 years, adding $400 billion per year in extra spending.
Yellen said that this would not be enough for inflation to over-run. And she said that the current “spurt” in prices powered by the stimulus would fade next year – toeing the line that the biggest burst of inflation in three decades that blew through the Fed’s target by a big margin would just be “temporary.”
But, and here it comes: If the current burst of inflation turns out to be not temporary and triggers more persistent inflation, and thereby higher interest rates, it would be a good thing.
“If we ended up with a slightly higher interest rate environment, it would actually be a plus for society’s point of view and the Fed’s point of view,” she told Bloomberg News.
“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” she said. “We want them to go back to” a normal interest rate environment, “and if this helps a little bit to alleviate things then that’s not a bad thing – that’s a good thing.”
“Alleviate things?” What things would be alleviated by higher interest rates? She didn’t say. Savers and government-bond investors earning a little bit of interest as to get some kind of cash flow going again so that they can spend a little more? People have been praying for this for years!
“I will not give up on the next [spending] packages,” Yellen said. “They’re not meant as stimulus, they’re meant as investments to address long-standing needs of our economy.”
If the temporary surge in inflation sticks and becomes persistent, monetary policy makers can handle it, she said. “I know that world – they’re very good,” she said. “I don’t believe they’re going to screw it up.”
Screw what up? Waiting too long with rate hikes and being too far behind the curve, only to have to crack down hard to get inflation back under control? She didn’t say what “screw it up” referred to. But there are endless options.
For Powell, this must surely be a breath of fresh air, to have the political backing for rate hikes and a “slightly higher interest rate environment,” as Yellen had put it.
Now the wait is on for Yellen to walk back her comments on Monday morning.
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My guess is it won’t be ‘walked back.’ The super low interest rates have not worked. Because using interest rate manipulation is inefficient. Nowhere near precise. Spending directly into productive investments and taxing away huge inefficiencies caused by income inequality are far more effective.
“The super low interest rates have not worked.”
Agreed. All I can see that super-low interest rates have reliably done is increase income inequality. [Or, more precisely, wealth inequality.] Skyrocketing stock and housing prices are a direct consequence of interest rates that are reliably below appreciation rates. When this happens, people can profitably borrow money for speculation purposes (i.e., to buy low and sell high), and the newly-printed dollars that continue to pour into the markets ensure that prices will continue to rise.
And who does this benefit the most? Those who already have lots of stock and real estate. How else could Elon Musk make $142 billion in 2020 when total revenues (not profits) at Tesla and SpaceX were less than half that number? Never in my life have a seen a policy that so clearly favored that “haves” vs the “have nots”.
And don’t forget about monopoly and oligopoly concentration. Super-low interest rates make it easier to borrow money to buy out competitors.
So they’ve worked. The rich got richer and the poor got poorer. The rich got to buy more assets, more wars, and more politicians. The poor got to beg for alms. How is this not working?
Wolf’s a smart man who can navigate the finance world and say the unsaid, but his constant potshots at the Fed, and his drumbanging about inflation gets really old.
This “Fiscal Conservative” ranting about the stimmies fueling inflation, instead of the more factual look at the supply crunch and price gouging (even from monopoly market makers) is pretty unbearable. It’s essentially “welfare queens” in new clothing. And most of these cranks don’t want to mention that the child tax credit is continuing to pump more money out, because no one wants to look like they’re saying “these kids eat too much.”
The underlying message from Yellen is that the Fed’s continued low interest rates will systemically send out cheap money to people who don’t need it and only legislature can get it to those who do.
Wolf can’t handle that message because he’d rather make “objective” charts.
Love his blog, but Wolf plays to a certain doomer commentariat who trend older and crusty. It’s not as bad as, say, Zero Hedge, but the commenters talking every day about quartering Jerome Powell, about how stimmies are a crime against humanity, and so on, gets old.
Wolf and his commenters seem to be wholesale against things like student debt relief, even the forbearance in place right now until September.
I’m not satisfied with the current order, but for supposed conservatives, they seem awfully comfortable with the government giving out predatory loans to minors with no possibility of bankruptcy. What’s conservative about that?
As for Yellen and her inflation/rates talk, I’ll believe that she’ll make money cheap when I see her make money cheap. Her interest rate increases were pitiful.
Correction, *when Yellen makes money expensive, not cheap.
Re-Volcker privilege?
Volcker Privilege, is that like White Privilege?
Not quite, just a play on words.
What if it’s not really about US inflation?
Assume for a moment there’s something on the horizon making the fed think they need to prop up the dollar.
This has been in the works since at least 2014:
https://www.nakedcapitalism.com/2014/11/russia-launch-new-payments-system-circumvent-swift-network.html
Seven years is a long time in the digital world. Today…
https://www.globalsecurity.org/wmd/library/news/russia/2021/russia-210504-presstv01.htm
What if the dollar stops being the only generally accepted ‘flight to safety’ in the world? Does the fed brain trust see a need to prop up the dollar in world markets? Enquiring minds want to know. / heh
How much difference would an interest rate rise of 100 basis points, mostly on the short end make?
a 1% increase in mortgage rates would ad $21,000 per $100,000 loan to the lifetime cost of a 30 year mortgage…the net effect would be a 10% hit to home affordability, and ultimately to home prices..
They’d have to raise it by 150 basis points to get it above the 10 yield. That would invert the yield curve and get everyone’s attention for sure.
I have to imagine getting two-thirds of the way there with a 100 point raise would be more than enough to cause the tepper tantrums.
Typical Democrat. Virtue signaling to Wall Street takes priority over winning the midterms. Like Obama, Biden is squandering his mandate, perhaps not as feverishly or intentionally.
Yellen is not wrong when she says rates have been too low for decade–they have been, and the subsequent asset bubble, particularly in stocks and real estate, has resulted in prices that aren’t grounded in reality.
As for how to unwind it, good luck–a lot of vested interests won’t be happy if the stock market drops and especially won’t be happy if their home value drops.
Since current markets are entirely based on emotion a rise of 100 basis points in interests could have a profound effect on people’s moods.
Human beings are rationalizing animals, not rational animals and when the herd is this spooky…
Yekken and the Fed (Powell) are all talk but they dance to the tune of Wall Street. Yuuge corporation like Apple, Microsoft, Tesla and others have been enjoying the low interest rates and the asset purchases by the Fed. They float bonds at a low interest rate and use the proceeds to buy back their own stock to enrich the majority stockholders with option purchase priveleges. Banks and real estate owning funds buy up homes and further goose the market. The high prices of homes have shut out most home buyers and there is now a frenzy to buy what’s available. The bubble is going to burst soon with or without the Fed raising interest rates. Many overextended buyers will be left holding the bag. We’ve seen this movie before and we know the ending (more bailouts for the banks et al and kick outs for the people!).
Wolf has said numerous times on his blog that the fed won’t let housing prices drop, or at least not too much. While I don’t agree with every he says this is one he might be right on, as unfair and inequitable a policy as it may be.
If housing prices don’t drop, homeownership will be permanently out of reach for a significant number of people in this country.
what I see is they are between a rock and a hard place, they can’t raise wages, and they can’t restrict asset values…what to do?
From the standpoint of the Federal Reserve powers and authority, they have more ability to directly affect asset prices than wages–even if they wanted to, it’s not easy to raise wages with what they have to work with.
There is no plausible scenario where wages and incomes are going to increase quickly enough to keep up with housing prices.
Either housing prices are allowed to correct, which for political reasons may not happen, or it’s game over for a lot of people’s hopes of ever buying a home.
yellen isn’t in the fed, she’s in the gov now, and beating the bushes
“The issue in the interview was inflation and whether or not it would be fired up further by the federal government’s $4 trillion additional spending spread over 10 years, adding $400 billion per year in extra spending.”
The government is borrowing trillions. Am I mistaken? The bankers make money from interest on loans.
Interest on $4 Trillion is no figure to sniff at.
Is that not a big dynamic in all of this?
The federal gov’t doesn’t borrow $4,000,000,000,000 from banks. It doesn’t have to. It won’t have any interest payments to make to anyone.
As far as I know it does – as does the ECB etc. The Treasury issues US bonds to the market-making banks at a discount, they ‘build a book’ of borrowers among commercial banks and investors, and the the Fed (and ECB) buys them from the market at resulting premium to what the Treasury issued them at. Another way of tranferring wealth from the taxpayer to the oligarchy.
And also to my point about the bankers wanting that higher interest on the $4 Trillion…not skin off the big corporations’ back as a good deal of the money going to the “government” goes to big corporations – for contracts of all kinds.
Every company you named is a government contractor.
The “government” is only in the picture to socialize the losses. Neoliberalism.
Yellen not Yekken! May it should be Yukken.
I’d like to know what she meant by “back to normal.” The “normal” since 1971? Skyrocketing and seesaw-ing? The “normal” preceding the GFC was anything but. I’ll cliff-dive here, back to the 80s (yes the 80s), when my accountant advised me that the big goal for monetary policy was 3% on the long T-bill. I have no idea what it is now. But it was certainly always considered normal for us to balance the budget (at the expense of social spending) and other counterproductive things in order to protect the exchange value of the dollar. Now it’s not so much the value of the dollar that is the concern – it seems to be the well being of society – which has never been the “norm” in this country. So maybe Yellen is using the term “normal” to indicate balance and fairness – which just isn’t part of our recent history. Show me where? In spite of my confusion, I kinda trust Yellen. Maybe she’s remembering the early 50s? I’d like to see a “new normal” under discussion.
My impression is, that Wolf misunderstood Yellen. Higher interest rates are supposed to result from the fiscal spending. Yellen justifies the spending as in “If the fiscal deficit leads to higher inflation interest rates will rise, which is fine by me, so there is no reason to not do the fiscal spending”.
Is Yellen missing her job at the Fed?
She seems to be talking a lot about rates and the Fed, I thought that was the domain of Powell.
Institutions are as good as the people who lead them.
The idea behind independent central banks was that they would serve as a check on government propensity to spend. Fed has the legal authority to say no to monetizing government debt and let interest rates rise hence limiting government spending. But Powell chose not to, it was entirely his decision to do what he did and if he yielded under pressure from the politicians he was a weak leader. Leadership matters.
Yet, there is one thing I dont understand.
If interest rates are kept low because of 120billon/month buying by the Fed, why are interest rates on corporate bonds so low?
If inflation is running at 3 to 4% who is buying those corporate bonds yielding less than 1%?
Surely its not the Fed as they are only buying treasuries and MBS.
“who is buying those corporate bonds yielding less than 1%?
Surely its not the Fed as they are only buying treasuries and MBS….”
I don’t know what the yield is on each corporate bond, but a quick search revealed:
https://www.cnbc.com/2020/06/29/the-fed-is-buying-some-of-the-biggest-companies-bonds-raising-questions-over-why.html/
https://www.msn.com/en-us/money/markets/a-primer-on-the-feds-corporate-bond-buying-program/ar-BB167BBY
Corporate bonds are priced relative to the 10y yield. The 10y yield has been on a continual decline since 1982.