Road to recovery may be paved with higher interest rates, Yellen suggests

  

Category:  News & Politics

Via:  perrie-halpern  •  one week ago  •  17 comments

By:   Martha C. White

Road to recovery may be paved with higher interest rates, Yellen suggests
Policymakers should learn to get comfortable with the idea of a moderate amount of inflation, even if that means higher rates, Treasury Secretary Janet Yellen said.

S E E D E D   C O N T E N T



In making the case for President Joe Biden's ambitious $4 trillion in spending proposals, Treasury Secretary Janet Yellen said policymakers should learn to get comfortable with the idea of a moderate amount of inflation, even if that means higher rates.

"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," Yellen said in a Bloomberg News interview on Sunday. "We've been fighting inflation that's too low and interest rates that are too low now for a decade."

In arguing that the fear of interest-rate creep is overblown, Yellen is affirming the stance taken by Federal Reserve Chairman Jerome Powell that price increases are transitory and — so far, at least — remain within the central bank's policy target.

"Higher interest rates in and of themselves are not necessarily good for consumers. But if it's the result of successful implementation of fiscal policy, Yellen and other Democrats are arguing that's perfectly OK," said Ben Koltun, director of research at Beacon Policy Advisors.

But economists have raised concerns, with some suggesting that growth models healthy enough to support a reasonable amount of inflation are overly optimistic.

"If the economy was really rapidly booming, rates would naturally rise, but that's not the case," said Joseph LaVorgna, managing director and chief economist of the Americas at Natixis. "To get rates higher, you need to have a robust economy."

The pandemic's impact on consumer behavior distorted spending on durable goods by pulling it forward, LaVorgna said. He predicted that even increased consumption of services in the coming quarters might not be enough to fill that gap, since an indeterminate amount of service-sector spending could remain depressed if Americans remain reluctant to engage in activities with high levels of interpersonal contact.

Higher interest rates could ripple through the housing market — which is already facing higher prices driven by supply constraints — and lead to higher borrowing costs across the board. Ted Rossman, senior industry analyst for CreditCards.com, said that even with the Fed's benchmark interest rate near zero, credit card customers haven't really benefited.

"As much as we've been talking about a record-low interest rate environment, that has not extended to credit cards," he said, adding that the average APR for new card accounts is a little over 16 percent. If the Fed had to sharply hike interest rates to rein in inflation, borrowers could see the cost of servicing their revolving debt jump, too.

LaVorgna hypothesized that Senate rules limiting how much spending congressional Democrats could push through without bipartisan support ultimately could lead to negotiations that significantly pare the size and scope of Biden's economic agenda.

"That suggests to me that whatever bill gets passed is … going to be smaller. That's going to support lower rates for two reasons," he said, since Wall Street expectations will be tempered and the Fed will be inclined to continue its course of accommodative monetary policy.

Such a high degree of uncertainty has prompted policymakers to re-evaluate their assumptions about the best methods to sustain the recovery.

"There has been a paradigm shift of the fiscal versus monetary policy debate in the Democratic policy world of how best to boost the economy," Koltun said. In the past, "monetary policy was seen as the primary force of economic growth," but today, "there are limits in a low rate world of what monetary policy can do," he said.

The key limitation of monetary policy is that the Federal Reserve has the power to lend but not spend, as the adage goes, which has prompted the Biden administration and most Democratic lawmakers to embrace an unprecedented experiment in stimulative fiscal policy.

"Yellen is advocating for a robust fiscal policy with the American Jobs Plan and American Families Plan, as well as defending the $1.9 trillion American Rescue Plan," Koltun said.

Yellen has recently sought to reframe this total of $6 trillion in proposed spending, telling Bloomberg, "They're not meant as stimulus, they're meant as investments to address long-standing needs of our economy."

Former Treasury Secretary and National Economic Council director Larry Summers has been one of the most prominent Democratic establishment figures warning of the potential risk of runaway inflation. Summers called overheating "the primary risk to the U.S. economy" in a Washington Post opinion column last month titled, "The Inflation Risk Is Real."

"While continuing relief efforts are essential, the focus of our macroeconomic policy needs to change," he wrote, pointing to recent increases in consumer prices and inflation expectations. "The history here is not encouraging. Every time the Fed has hit the brakes hard enough to slow growth meaningfully, the economy has gone into recession."

Yellen, a former Federal Reserve Chair herself, has expressed confidence that Powell's Fed can avoid this fate — a show of faith that could ultimately define her legacy at the helm of the Treasury Department.

"It's always an expectations game," Koltun said. "This is something that can be very hard for the Federal Reserve to control."


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Ender
Professor Principal
1  Ender    one week ago

Aww. Congress will have to pay the piper...

 
 
 
JBB
Professor Principal
2  JBB    one week ago

I wish we got a decent return on savings accounts.

My grandparents got 14% on CDs. I get nothing now.

 
 
 
Snuffy
Junior Quiet
2.1  Snuffy  replied to  JBB @2    one week ago

So long as there is some management. My parents also paid 13% interest on a home loan. And auto loans during that time were close to 20%. 

 
 
 
Krishna
Professor Principal
2.2  Krishna  replied to  JBB @2    one week ago
I wish we got a decent return on savings accounts. My grandparents got 14% on CDs. I get nothing now.

Investors usually thing of financial instruments (stocks, ETFs, Mutual Funs, bonds, savings accts, etc) as being primarily for either growth..or income;

1. Growth (stocks): When investing for growth, you want the stock price to keep going up. If a stock is $100/share, and it eventually goes up to $200/share...that's "growth" (in stock price. If you sell it all at $200, you've doubled your money. Most of the best growth stocks pay little or no dividends. Pure Growth investors often don'tcare even if dividends are 0%!-- they just want the stock to keep going up so their holding increase in the future.

2. Income. In most cases that means dividends. While its nice if dividend paying stock appreciate in value over time, a pure dividend investor might not even care if the stock price is the same a few years later! (Yes-- if you're getting, say 10%/year and DRIP  it (auto-reinvest dividends). 

 
 
 
Krishna
Professor Principal
2.2.1  Krishna  replied to  Krishna @2.2    one week ago

Some stocks are bought for growth, and some also pay small dividends.

Generally speaking, the higher the dividend the riskier the stock. 

Its not too hard to find stocks paying 12% or higher-- but generally that's a "red flag"-- the company might be going bankrupt in the near future!

For years I've considered Verizon the "happy medium"-- a decent dividend (4%+ or so)-- yet a relatively safe stock, and one that would grow .in value. I would look for stocks paying at least 4% (3% seemed too small a dividend, 5% or higher usually too risky.

But as I've gotten better at investing, I try to maximize dividends (generally I don't buy anything under 6%) or even higher while also being rock solid.

I recently  a relatively safe ETF paying close to 10%...safe in an up or flat market, but did poorly in a crash & recovered slowly. And it consists of solid companies-- the NASDZQ 100! Now I have a similar one  with slightly smaller dividend ("only" 7.8%)....but also does very well in a correction.

And--- I also try to buy relatively hi dividend payers that will also gradually increase in value...

 
 
 
Nerm_L
Senior Principal
3  Nerm_L    one week ago

The stimulative influence of the COVID relief package is undeniable.  The arguments for relief were valid but the actual package applied that relief indiscriminately.

Biden's proposed $6 trillion budget will also exert an oversized stimulative influence on the economy.  So large that the necessary measures to control inflation would likely trigger a recession.  The pandemic created what was essentially an artificial recession.  Now that those artificial barriers have been removed, the economy is recovering fairly rapidly.  An inflationary recovery does not require stimulative influences from government.  Yet that is exactly what Biden's budget proposal will achieve.

Janet Yellen is in a 'damned if she does and damned if she doesn't' political mire.  Yellen can't advocate reigning in government spending because that would oppose Biden's agenda.  And Yellen can't apply aggressive fiscal measures to control inflation because that would hamper the recovery and could trigger a recession. 

The wild card is how the Fed handles monetary policy while trying to wind down the easy money policy from the last recession.  It looks like a recession is looming on the horizon.  The question is how big it will be.

 
 
 
expatingb
Freshman Quiet
3.1  expatingb  replied to  Nerm_L @3    one week ago
It looks like a recession is looming on the horizon.  The question is how big it will be.

If the FEDs keep printing money like it's on toilet paper, it will make the stagnation of the Carter era look good.

 
 
 
JBB
Professor Principal
3.1.1  JBB  replied to  expatingb @3.1    one week ago

Trump's 2020 deficit was what? 3 or 4 TRILLION!

 
 
 
expatingb
Freshman Quiet
3.1.2  expatingb  replied to  JBB @3.1.1    one week ago
Trump's 2020 deficit was what? 3 or 4 TRILLION!

In response to the COVID pandemic and pumping trillions into the economy.

Besides, do you understand the difference between deficit and debt?  You don't pay interest on a deficit until it becomes a DEBT.

 
 
 
JBB
Professor Principal
3.1.3  JBB  replied to  expatingb @3.1.2    one week ago

Yes, and Trump and the gop blew both UP!

Trump's deficit is now added to our debts.

 
 
 
expatingb
Freshman Quiet
3.1.4  expatingb  replied to  JBB @3.1.3    one week ago

And have no fear....  Biden is succeeding in doing what Trump did in four years in less than one.

Here are the numbers:

The United States currently has $27.68 trillion in total debt.

Of this total, $21.57 trillion is "public debt" (money owed to foreign governments, individual investors, etc), while the rest is in the form of "intragovernmental holdings" (money owed to programs like Social Security).

On President Trump's first day in office (January 2017), the total debt load of the nation was $19.947 trillion.

So, over the course of a little less than 4 years, the United States added roughly $7.733 trillion in debt.

Just before the COVID-19 pandemic started in the United States, the national debt load of the country was $23.442 trillion. So, despite the relatively strong economy, the country had still added $3.5 trillion in debt.

Since the start of the pandemic, the nation has added an additional $4.24 trillion in debt, all over the course of 10 months. This number will continue to expand rapidly over the foreseeable future, as more stimulus is expected under President-elect Joe Biden.

All in all, deficit and debt hawks have to be feeling a little light-headed as they look at these numbers, and I expect that the nation's debt levels will be a much bigger issue over the next four years.




 
 
 
Nerm_L
Senior Principal
3.1.5  Nerm_L  replied to  JBB @3.1.1    one week ago
Trump's 2020 deficit was what? 3 or 4 TRILLION!

But Trump's deficit wasn't as stimulative (and inflationary) because the economy had been artificially shut down to mitigate the pandemic.  2020 was a government imposed artificial recession unrelated to economic performance.

Acknowledging those facts doesn't suggest that the mitigation efforts were unnecessary.  But citing 2020 to support economic arguments is, frankly, looney tunes.

 
 
 
Tessylo
Professor Principal
3.1.6  Tessylo  replied to  expatingb @3.1.4    one week ago

Why would we trust some random blog as your source XM?

 
 
 
Krishna
Professor Principal
3.1.7  Krishna  replied to  expatingb @3.1.4    one week ago
Of this total, $21.57 trillion is "public debt" (money owed to foreign governments, individual investors, etc), while the rest is in the form of "intragovernmental holdings" (money owed to programs like Social Security). On President Trump's first day in office (January 2017), the total debt load of the nation was $19.947 trillion. So, over the course of a little less than 4 years, the United States added roughly $7.733 trillion in debt.

In theory, increasing debt is a bad idea. Often true for individuals, damilies, businesses...

But I'm a bit of an  non-conformist here. Personally, I don't consider the national debt (federal gov't debt) to be a major issue. 

When you're in debt, it means you owe money to someone. So-- if the Federal Government is in debt-- who do they owe that money to?

(Think about that a minute....)

 
 
 
Nerm_L
Senior Principal
3.1.8  Nerm_L  replied to  Krishna @3.1.7    one week ago
When you're in debt, it means you owe money to someone. So-- if the Federal Government is in debt-- who do they owe that money to?
(Think about that a minute....)

We'll find out if the Federal government defaults on debt.  

Arguing the technicalities of bonds versus loans doesn't change the nature of debt default.  Somebody will get a haircut.

 
 
 
XXJefferson51
Senior Guide
3.1.9  XXJefferson51  replied to  expatingb @3.1    one week ago

That’s a scary thought.  At least higher interest rates will stop this ridiculous deficit spending.  As the amount of the federal budget that has to be spent on just interest on past debt, the appetite and the ability to add on more debt will wane.  I remember the high interest rates and inflation of my late teens and early 20’s.  It is simply shocking to see elected leaders engaging in policies they know will bring that back.  

 
 
 
Buzz of the Orient
Professor Principal
4  Buzz of the Orient    one week ago

IMO that "moderate" amount of inflation is going to get big enough to prevent a lot of people from being able to afford many of their usual necessary purchases when Biden's new "cold war" competition with foreign supply chains requirement becomes effective.

 
 
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