Insights from former Federal Reserve Chair Janet Yellen

It was exciting to hear directly from Janet Yellen the other day about her views on where we are and how it relates to economic policy.  Here are some of the high points:

• July of next year will likely mark the longest economic expansion in America. The tight labor market is a concern, hope the economy doesn't overheat.
• Inflation may move up with unemployment but doesn't seem to think it will become a problem. Fed will work too take slowly and try to avoid another recession.
• We've had a correction in the market, but financial conditions are still fairly accommodative. At least a couple rate hikes will be necessary to stabilize growth and the labor market. Some cooling is likely in housing already from higher mortgage rates.
• Guess is the average Fed funds rate over the next ten years will be about 3% (ONLY THREE RATE HIKES FROM HERE)
  • Why? The unemployment rate is the lowest in 50 years
  • The ratio of job openings to unemployed people to fill those jobs lowest for a long time
  • Perceptions of job market being good from Americans
  • #runninghot this could be inflationary, already at 2% target, could need to reverse course
• Why not let rates stay here like Trump wants?
  • The policy takes a long time to have an impact, so the Fed is very forward-looking, they can get too far behind the curve.
• She thinks it is unwise for the president to be commenting on Fed policy. Central Banks operate more productively in a truly non-political environment. The Fed has never to this day been political.  Can undermine confidence in the Fed serving the best public interest.
• She seems fine with not being there now, and said she would do the same as Powell is doing.
• Trade used to be a macro win-win, now seems like more of a zero-sum game. Our failure to address some of the micro failures (middle-income jobs) had left us with a lot of Americans feeling left out of the economy.
• Next recession will likely be from financial imbalances and Fed tightening. Not likely in 2019, 2020 more likely and doesn't have to be a deep recession.
• Short rates were at zero for seven years
• The Fed is going at exactly half the rate hike schedule than they were doing as a slow measured pace starting in 2004. Right now real short rates are just about zero.
• Next year she would guess slower growth (2018 about 3%), a sustainable level of growth may be 1.8-2%, but next year about 2.5% because of fiscal boost.
• Do the tax cuts have the ability to change the economy permanently and its growth rate?
  • Economist studies suggest no.
• Trade tariffs could allow things down but more worried about how it might impact investments in the future
• The national debt is a major problem about 77% of GDP, SS, Medicare, Medicare will go from 10 to 15% of GDP, debt service will become more problematic as population ages, and health care costs inflate faster than inflation.  Work on health care costs and spending, SS reforms.
• If you had a magic wand, what would you do?
  • "Raise taxes and cut spending."
• Well deflected question on what she thinks of the executive branch leadership
• 2020 recession probability a "little" bit higher than average year of 20%.
• What keeps you up at night?
  • Our role in the economy, China, trade policy, us abandoning strange role in the economy during the post-war period. Protectionism was previously avoided and discouraged to promote growth around the world and keep others from damaging the US.  I frankly don't understand the changes and don't think our trade partners do either
• Doesn't think China will see a hard landing because they have a lot of tools at their exposure, but it could slow which would impact everything. Not in China's own interests to stop buying Treasuries.  Wouldn't want to hurt their existing position, think it would hurt them more than it would hurt the US.
• Reasonability of women and minorities who rise up to high levels to help others up, progress is being made but still out of balance. At every level the percentages decrease, work-life balance part of it, how can we make jobs more livable, female Central bankers are right now at about 10%.

This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.