The US presidential election is now behind us and President Elect Joe Biden is expected to be inaugurated on 20 January 2021. Preparing to step into the Oval Office, he has already started to put together his cabinet. One of the most important positions, that of Treasury Secretary, is to be filled by Janet Yellen. If confirmed, Ms Yellen will be the first woman to head Treasury in its 231-year history. Janet Yellen was the Fed chair from 2014 to 2018 and during her tenure, the US economy experienced strong economic growth and the lowest unemployment rate in decades.
While in charge of the Fed, Yellen was considered by many market participants to be a “dove” (more concerned with unemployment than with inflation) and advocated the use of monetary policy in stabilising economic activity over the business cycle. She has often defended the more than $ 3 trillion of stimulus that was injected in the economy by her predecessor Ben “Helicopter money” Bernanke. Over the years she has made many comments which illustrate her belief that inflation and economic activity is strongly related to one another. In her 2010 nomination hearing for Vice-Chair of the Federal Reserve Board of Governors, Yellen said, “The modern version of the Phillips curve model —relating movements in inflation to the degree of slack in the economy—has solid theoretical and empirical support.” Prior to having made that statement, Yellen gave a speech in 2007 as President of the Federal Reserve Bank of San Francisco where she is quoted as saying, “I have supported the decision to hold policy steady at the current rate despite inflation remaining higher than I would like it to be. Let me be clear that I do want inflation to move down, but as I just indicated with my forecast, I believe policy may now be well-positioned to foster exactly such an outcome.”
As a “Keynesian” economist, we may likely see expansionary fiscal policy from the Treasury in coming months. Janet Yellen recently co-wrote a piece in the New York Times in which she criticised the Senate’s lack of urgency and emphasised the need for additional stimulus.
“Keynesian economics is a macroeconomic theory of total spending in the economy and its effects on output, employment, and inflation. The theory advocates for increased government expenditures and lower taxes to stimulate demand and economic activity.”
She and her co-authors argued that both monetary policy from the Fed, and fiscal policy from the US government, are necessary to pull America out of the crisis. While the Fed has largely done its job by cutting interest rates, they wrote, more fiscal stimulus is needed. “When unemployment is exceptionally high and inflation is historically low, as they both are now, the economy needs more fiscal spending to support hiring. Monetary power sets the table and Congress’s fiscal dollars bring in the diners,” they wrote.
“This loss in fiscal support is what I’m tremendously afraid is going to lead to retrenchment in the economy or a complete petering out of growth,” Yellen told journalists at a subsequent interview. When asked how much is the right amount of fiscal aid, Yellen answered: “We need enough spending in the economy to support jobs, so that there’s enough demand for the goods and services that the economy is capable of producing. I don’t have a number to give you. But estimates that I’ve seen suggest that something in the order of a trillion dollars would be too little.”
Yellen was also quoted on Bloomberg TV recently as saying: “These concerns pale in comparison to what I view as the potential economic and human costs of failing to reduce the unemployment rate as aggressively as we can”.
If Janet Yellen’s appointment is confirmed, it seems that accommodative fiscal policy may be on the cards. This outcome will be supportive of our inflation expectations I wrote about in last months newsletter.
Pyxis update:
This month, Carla, who holds a masters degree in psychology, wrote a blog about behavioural finance. A very interesting piece about the mistakes we are preprogrammed to make when thinking about finance. I am sure building checks into our process to correct for these potential pitfalls will lead to better decision making. I hope you enjoy it.
We wish you a safe and festive holiday season. Rest well and have a much deserved break after a very tumultuous and difficult year!
Bennie and the team.
