Why Yellen changed her mind about more federal spending
China sees fresh financial turbulence
washington — President-elect Donald Trump has pledged deep tax cuts and increased infrastructure spending to restore lost jobs, accelerate the economy and bring prosperity to more Americans. Janet Yellen has her doubts. After a presidential campaign full of blunt words and sweeping promises, the Federal Reserve chair sought to make a nuanced point: the moment for a deficit-fuelled stimulus to improve job creation has likely passed.
With unemployment at a low 4.6 per cent and hiring consistently solid, Yellen said she thought employers no longer needed large tax cuts and heavy infrastructure spending to create jobs.
In fact, she suggested that with unemployment at a nine-year low, a major stimulus of the kind Trump is pushing could pose risks. For one thing, Yellen indicated that the government’s debt could become a heavier burden. “As our population ages, the debt-to-GDP ratio is projected to rise,” she said.
“And that needs to continue to be taken into account.”
Yellen’s remarks, at a news conference after the Fed announced it was raising its key interest rate, cast her in an unusual role: once a strong advocate of federal spending to support the economy in the aftermath of the Great Recession, Yellen now has cautionary words about such efforts. Besides expanding the government’s debt, a heavy dose of economic adrenaline at this stage could also cause the economy to overheat.
If that were to happen, the Fed would likely feel compelled to repeatedly raise its benchmark rate. Higher borrowing rates, in turn, would slow growth.
“I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment,” Yellen said. For years after the recession officially ended in 2009, Yellen and her predecessor, Ben Bernanke, had encouraged additional federal stimulus, concerned that the Fed alone could not support a fragile recovery.
Her retreat from that view reflects a belief that the economy is now on firm ground. With low unemployment and inflation edging toward their two per cent target, Fed officials voted unanimously Wednesday to raise the federal funds rate for just the second time in more than a decade.
That rate sets the range for what banks can charge each other for short-term loans, and it heralds higher rates for some consumer and business lending. Carl Tannen- shanghai — The US Federal Reserve’s decision to raise interest rates will stoke fresh financial turbulence, and global “disorder” is in store as the dollar strengthens from an accelerated pace of rate hikes, China’s state news agency Xinhua said in a commentary.
The Fed move “will inevitably cause fresh financial turbulence, and worsen the situation of those countries that overly depends on external financing and are insufficiently capable of paying (off) debt, especially those emerging markets”, Xinhua said on Thursday. baum, chief economist at Northern Trust, saw Yellen as taking a cautious tact. “She was very careful,” he said. “She was pretty good today about being balanced on the prospects of new policies. She was good at deflecting questions about the new administration.”
Yellen declined to say whether she thought a Trump stimulus program would necessarily prompt faster Fed rate hikes over the next few years. Fed officials now forecast that they will raise rates three times in 2017, up from two increases in their previous forecast.
Details about Trump’s policies
On Thursday, China’s yuan fell to its weakest level in eight-and-half years against a broadly stronger US dollar, after the Fed raised interest rates by 0.25 basis points and projected more interest rate increases than previously expected.
Earlier this month, Chinese Vice-Finance Minister Zhu Guangyao said in a media interview that a rate hike would mean heightened capital outflows for all markets, including China.
The Fed move comes shortly after China reported that its foreign reserves at end-November remain too scarce for the Fed to adjust its policies accordingly. But the nonpartisan Committee for a Responsible Budget estimates that Trump proposals would add $5.3 trillion to the national debt over 10 years. “I wouldn’t want to speculate until I were more certain of the details and how they would affect the likely course of the economy,” Yellen said.
Yellen herself has frequently noted that many Americans haven’t benefited from the job market’s steady improvement. And on Wednesday, she said she’d welcome having the White House and were at the lowest level in nearly six years. The central bank last month sold a net $55.4 billion worth of foreign exchange, the highest since January.
“If the United States accelerates its rate hike pace in the future, a stronger dollar would bring disorder worldwide” as different countries have different interest rates, Xinhua said.
The commentary said it was “advisable” for the US to enhance coordination with other major economies on macro policies, and prudently handle the pace of rate hikes. — Congress take steps to support job seekers and increase economic growth over the long run.
She spoke favourably, for example, about job training initiatives, tax reform, increased public and private investments and polices that aim to spur innovation and create businesses.
Greater worker productivity is “the ultimate determination of the evolution of living standards,” Yellen said. And then, ever focused on the Fed’s independence, Yellen stressed that she was “not trying to provide advice to the new administration or to Congress.” —