Janet Yellen's Flip-Flop And What She's Really Telling Us
ZeroHedge - BY TYLER DURDEN, MAY 05, 2021 - 08:29 AM Â Â Â Â Â Â Â Â Â Â Â Â Â
Authored by Michael Maharrey via SchiffGold.com,
Treasury Secretary Janet Yellen sent markets into a tizzy on Tuesday when she said interest rates may have to rise to keep the economy from overheating with all the government stimulus. But later in the day, she walked those comments back, claiming inflation isnât going to be a problem and insisting that she wasnât suggesting or predicting rate hikes.
Yellenâs flipflop is telling. Even if inflation is an issue (and it is), there isnât a darn thing the Federal Reserve can do about it.
Yellen made her first comments during an event hosted by The Atlantic magazine. She warned that all of the government spending coming down the pike could cause the economy to âoverheat.â Thatâs code for âit could cause price inflation to surge.â
It may be that interest rates will have to rise somewhat to make sure that our economy doesnât overheat, even though the additional spending is relatively small relative to the size of the economy.â
Yellenâs comments spooked markets that are already worried that the Fed might tighten monetary policy sooner than later to deal with increasing price inflation. Tech stocks in particular were hammered after Yellenâs talk.
But the Treasury secretary walked back her comments later in the day. She told a Wall Street Journal CEO Council event that she doesnât anticipate an inflation problem and she parroted Federal Reserve Chairman Jerome Powellâs mantra that any price increases will be âtransitory.â
Yellen was asked directly about her earlier comments and she insisted she was neither recommending nor predicting a Fed rate hike, appealing to the central bankâs mythical independence.
âIf anybody appreciates the independence of the Fed, I think that person is me,â she said.
âI donât think thereâs going to be an inflationary problem. But if there is the Fed will be counted on to address them.â
I think sheâs wrong on both counts. There is an inflation problem and the Fed canât do anything about it.
In a tweet, Peter Schiff said thatâs exactly why Yellen walked back her comments.
There has been an inflation problem for quite a while â from the moment the Fed starting printing trillions of dollars out of thin air to monetize trillions in government spending. And weâre now starting to see the impact of that inflation on prices.
Anybody who has been to the grocery store, the gas station, or Home Depot has experienced big price increases first hand. The question is: are these really âtransitoryâ price hikes due to supply chain bottlenecks as the economy reopens and a return to normal oil demand, as Yellen insists?
She had better hope so.
Because despite her assurances, the Fed canât be counted on to address them given the state of the economy.
The very fact that the markets threw a fit at even a hint of rate increases bears this out. Can you imagine the carnage on Wall Street if the Fed actually raised rates? This bubble economy is predicated on artificially low interest rates and running up debt. This economy canât run on higher interest rates. Thatâs exactly why the central bank is keeping them artificially low, and why Powell and Company desperately want us to believe that they wonât have to take action to deal with inflationary pressures.
Yet despite their best efforts, weâre still seeing rising rates on the long end of the bond yield. They spiked again after Yellenâs pontification. In fact, Reuters quoted a TD Securities interest rate strategist who tried to give Yellen cover by pointing out rates were already rising.
She was actually asked about the growing share of government spending to GDP and she was asked a very economist question and she answered in a very economist way, where interest rates to yields might have to rise a little bit for the reallocation of resources and the market read that as rates will have to rise. But I think theyâve already risen. Theyâve gone from 1% to where we are now, so itâs certainly quite a bit already. I donât think it was meant to be an impactful statement that yields will have to rise now.â
And therein lies the rub.
The US government canât afford rising rates. And it certainly canât have the Fed tapering its bond purchases. In fact, I would argue Uncle Sam is going to need the Fed to step up its quantitative easing in order to monetize the additional borrowing thatâs looming in the future. Biden and his fellow Democrats in Congress can pretend that all of this proposed spending will be paid for by tax hikes, but they are living in fantasy land. The government will pay for Bidenâs infrastructure plan and the âAmerican Families Planâ the same way it paid for all of the coronavirus stimulus spending.
It will sell bonds.
That means the Fed will have to keep buying bonds with money printed out of thin air in order to keep the bond market from completely imploding.
Earlier this week, the Treasury Department upped the amount of money it plans to borrow in the second quarter. And not just by a little bit. In February, the Treasury projected borrowing in Q2 would come in at a relatively modest $95 billion. The new estimate for second-quarter borrowing is $463 billion. Then, in Q3, Uncle Same will nearly double that, with estimated borrowing of $821 billion.
And I guarantee you there will be more borrowing after that. Thatâs the only way the government can feed these ballooning deficits.
The borrowing and spending tell you all you need to know about the trajectory of interest rates. Theyâre staying right where they are â inflation be damned. In fact, both Powell and Yellen have cited low interest rates as the reason the government can make all of these âinvestmentsâ in the economy.
The Fed is boxed into a corner. Powell knows it. Yellen knows it. But give them props â they are putting on quite a show trying to assure us everything is fine to keep the markets calm. It reminds me a little bit of the orchestra playing as the Titanic sinks.
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