Janet Yellen Strays From the Party Line

by Greg Valliere, AGF Management Ltd.

EXCESSIVE CANDOR IS A MIXED BLESSING in Washington, where spinning is an art form. So here comes Janet Yellen, who should know better, spilling the beans over what the Fed might do as the economy heats up.

YELLEN IS NOT SIMPLY ANOTHER TREASURY SECRETARY, she’s the ultimate Federal Reserve insider, privy to the Fed’s thinking about the economy and interest rates. Her skills as an economist are unquestioned, but her political skills perhaps are still evolving.

HERE’S WHAT SHE SAID, ESSENTIALLY: Yes, we’ve spent a ton of money and we want to spend a ton more. If that leads to inflationary pressures, that could be temporary — or the Fed could deal with it by raising interest rates a little.

ONE CAN ONLY IMAGINE THE REACTION BY JEROME POWELL: The Fed Chairman has steadfastly refused to speculate about rate hikes; he doesn’t even want to talk about tapering the central bank’s $120 billion in monthly asset purchases.

YELLEN’S SUGGESTION GENERATED A BRIEF MARKET SELLOFF, but by evening she was back on message, offering assurances that inflation won’t be a problem. But it already is a problem (see: lumber and housing prices, gasoline, labor shortages, etc.).

THE TREASURY SECRETARY has to be concerned about an over-heating economy. Non-farm jobs are expected to surge by over 1 million in Friday’s unemployment report — perhaps quite a bit higher — and some forecasters expect a second quarter GDP rise of 10%.

WE HAVE WRITTEN CONSISTENTLY SINCE WINTER that the U.S. economy will be near full employment by the end of this year, and our outlook has not changed. Now we know that Yellen and possibly Powell have thought about that scenario, and a rate hike (or tapering) may have to come much more quickly than Powell has indicated in public testimony.

THANKS IN PART TO YELLEN’S COMMENTS, the Fed will have to address its thinking on over-heating, inflation, and monetary policy. This debate will be percolating at the Jackson Hole Fed conference in late August — if not sooner. The June 15-16 FOMC meeting just got a lot more interesting.

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This post was first published at the AGF Perspectives Blog.