Janet Yellen Leaves Us With Goldilocks Economy

Steady economic growth, rising asset prices, and a restrained rate of inflation are retiring Federal Reserve Chair Janet Yellen’s legacy as she gets ready to leave the central bank early next year. This is what all Street loosely refers to as a “Goldilocks” economic scenario, the best of all possible worlds.

“At the moment the U.S. economy is performing well. There’s less to lose sleep about than has been true for quite some time,” Yellen said at a press conference last Wednesday, after the Federal Open Market Committee raised the key federal funds lending rate to a modest range of 1.25% to 1.5%.

“When we look at other indications of financial stability risks, there’s nothing flashing red there or possibly even orange,” Yellen said. “The global economy for the first time is doing well. We’re in a synchronized expansion. This is the first time in many years we’ve seen this.” In short, the Fed is predicting a possible endless expansion with minimal inflationary pressures. “I feel good that the labor market is in a very much stronger place than it was eight years ago,” Yellen added.

The Fed is predicting 2.5% growth for the U.S. economy in 2018, up from the previous estimate of 2.1%. It expects the tax cuts to provide some modest lift to GDP growth. Another 3 rate hikes are expected in 2018, bringing the federal funds rate up to 2.25% from its current 1.5%, still low enough not to restrain economic growth. As to the tax plan Yellen suggested that the “magnitude and timing of the macro-economic effects of the tax passage remains uncertain. But she expects the package will boost both consumer spending and capital spending to some extent. Her biggest worry is the added debt to GDP levels from the tax bill. “ At the moment it is not extraordinarily or worrisomely high. But it’s also not very low” Yellen said at the press conference.

Yellen expects inflation to move higher and to stabilize around the 2% rate, but she admits “our understanding of the forces driving inflation is imperfect.”

On markets Yellen suggested that just because they are high doesn’t necessarily mean they are overvalued. Asset values are “elevated,”—at the high end of historical levels. But that doesn’t necessarily mean they are “overvalued.” Higher valuations are supported by lower interest rates. Nor does she think a sharp decline in stock prices would not be a severe risk to the economy. A very rosy view indeed.

She admits being unsure why inflation is remaining low at a time of modest unemployment, but believes it will pass eventually. The reason wages are not going up very fast is that the labor market is not getting overheated. This is an unusual period when we have an expansive fiscal policy represented by the tax bill going through Congress as compared to the restraining hand of the Fed in tightening the supply of money.

Charles Ripley, senior investment strategist at Allianz, the German financial giant, told Forbes. “All boats of global growth are rising for the first time since 2010. The outlook for growth is good because of the fiscal stimulus from the tax bill. Inflation is drifting higher but not at as fast for the first time in many years.”

Queried about the speculation in bitcoin, Yellen was merciless in casting the digital currency as lacking “a stable source of value and doesn’t constitute legal tender. It is a highly speculative asset.” She called the risks posed by bitcoin “limited” and emphasized it plays a “small role” in the nation’s payment system.
Source: Forbes

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