TIPS For Secretary Yellen

As Ben Bernanke has another one of his myths begin the process of falling apart, his successor Janet Yellen chimes in today with yet another reminder of why that must be. Though Yellen now sits in an even bigger chair, so to speak, having failed upward to Treasury, this one’s the sort of thing upon which a Federal Reserve Chairman would opine.

Before being forced to walk back her clumsy, ill-conceived comments, Secretary Yellen talked about how interest rates might have to rise a little bit if only to constrain the inflation so much beneficial government spending could unleash. As if 2015’s debacle never happened, here she is yet again talking about modest overheating if this time as a consequence of fiscal tomfoolery.

Remember, back in 2015 after having terminated QE’s 3 and 4 (yes, there had been four) in December 2014, she and the rest of the mainstream crew had expected to begin the rate-hiking phase as early as June of that year (brought up by her maladroit “six months” gaffe delivered at her very first press conference). The “best jobs market in decades” had driven the unemployment rate down into what outwardly seemed inflationary full employment – while a lot of other indications warned there was so much more to the monetary, financial, and economic picture. 

Because of that, Yellen’s Fed would manage only a single rate hike in December followed by a yearlong pause no one there or anywhere has yet managed to explain (while Ben Bernanke clung more tightly to his “term premiums” nonsense). The intent then, as she is saying now, was to bring rates up so as to head off and control modest inflationary pressures she believed were already evident but which didn’t actually exist in reality.

The same situation as had been forecast and foreseen by falling not rising rates.

Most people typically learn from making such crucial, highly public errors.

It had been the bond market globally, of course, which had pointed this out going all the way back to the beginning of 2014 (and eurodollar futures several months earlier still). Getting things complete backward, it had been rising yields in the second half of 2013 (the incorrectly labeled “taper tantrum”) which would’ve been the inflation confirmation – if it held.

What that meant was rising yields don’t choke off inflation – they confirm it as a realistic possibility when they go up farther and then stay up. Having nothing whatsoever to do with “too many” Treasuries or a supply problem, even Bernanke saw the Fisherian consequences; he just couldn’t line them up properly missing that key (global) piece.

These contrary disinflationary pressures arose and proliferated worldwide while yields fell even though Yellen or any Economist claims this is what happens when rates rise. Their cart always in front of the horse.

Thus, what Yellen was saying then as now the equivalent of circular logic.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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