Tag Archives: fed

Fed Chair Yellen cites income gap among long-term risks

The U.S. economy is on solid ground now but it faces long-term risks posed by slow productivity growth and the widening income gap, Federal Reserve Chair Janet Yellen says.

Speaking recently to a gathering of teachers, Yellen said that she sees no major short-term risks facing the economy.

However, sputtering productivity growth and growing income inequality are serious long-term concerns.

The Fed chair said both challenges are outside the scope of the Federal Reserve to handle with its interest-rate tools, so it is important for other policymakers to address them.

She cited a recent study that included a “very shocking finding” — death rates in the 45-to-54 age group are actually rising.

Yellen said there appeared to be a link between this increase and higher rates of suicide and health issues related to substance abuse.

“The thought is that this is a reflection of greater economic insecurity,” Yellen said. “Obviously these are very disturbing trends.”

To promote the study of economics, Yellen held a national town hall meeting with teachers gathered at the Fed’s headquarters in Washington and in groups listening in at Fed regional banks around the country.

In prepared remarks, she said the study of economics can help students manage their personal finances and also provide them with the skills for analytical and critical thinking needed for success later in life.

“Economics provides knowledge and skills of practical use in college and in the workplace and it also provides skills to plan and make wise financial decisions,” Yellen said.

Asked in the question period how an introductory course on money and finance should be designed, she said she would make a number of changes to how she taught such a course many years ago, incorporating the lessons learned in dealing with the 2008 financial crisis, the worst since the 1930s.

She defended the bolstering of the safety and soundness of the financial system brought on by the Dodd-Frank Act that Congress passed in 2010 to prevent a future crisis. Republicans in Congress and President-elect Donald Trump have said they want to roll back some of the changes to make regulation less burdensome.

In her remarks, Yellen said that economics training can play an important role in improving the capabilities and creativity of the workforce.

“Everyone is engaged in and depends on the economy and nothing is more critical to a healthy and growing economy than the capability, creativity and productiveness of its workforce,” Yellen told the teachers. “Whenever I am asked what policies and initiatives could do the most to spur economic growth and raise living standards, improving education is at the top of my list.”

Yellen said that consumers, whose individual spending decisions account for two-thirds of economic activity, can better weather hard times if they have the proper training.

“Stronger household finances overall can help sustain growth, stabilize the economy and mitigate an economic downturn,” she said.

Yellen also put in a plug for what she called the most important teaching aid the Fed produces, a 182-page book called “The Federal Reserve System: Purposes and Functions.” She urged the teachers to check out the new 10th edition of this book on the Fed’s website.

Globalization took hits in 2016; Will 2017 lead to more?

Globalization, the path that the world economy has largely followed for decades, took some hefty blows in 2016.

The election of Donald Trump as U.S. president and Britain’s decision to leave the European Union have raised questions over the future of tariff-free trade and companies’ freedom to move production to lower-cost countries.

Borders are back in vogue. Economic nationalism is paying political dividends.

“We want our country back” was the rallying cry of those backing Brexit, a sound bite that had echoes in Trump’s “Make America great again.”

The rise of Trump and the triumph of Brexit had their roots in the global financial crisis of 2008.

Eight years later, the world economy has still not yet fully gotten past that shock to its confidence — people are nervous, some are angry, and many are seeking novel solutions to their problems. Next year, there’s scope for more uncertainty with elections in France and Germany.

Here’s a look at the year’s top business stories for 2016:

BREXIT SHOCK

In what was a sign of things to come, Britain voted to leave the EU in a referendum in June. The decision came as a surprise — certainly to bookmakers and many pollsters who had consistently given the “remain” side the edge — and means Britain has to redefine itself after 43 years of EU membership. David Cameron resigned as prime minister after the vote and the new Conservative government led by Theresa May is planning to trigger the formal process by which Britain exits the EU early next year. There are many shades of potential Brexit, from an outright divorce that could put up tariffs on goods and services, to a more amicable parting that sees many of the current trading arrangements kept in place. The pound’s fall to a 31-year low below $1.20 at one point is testament to that uncertainty.

 

TRUMP CARD

Pollsters and bookmakers got it wrong again a few months later when Trump defeated Hillary Clinton in the U.S. presidential election. Whether he translates his “America First” platform into action following his inauguration in January will help shape the global economy for the next four years at least. Trump has railed against long-standing trading agreements, including the North American Free Trade Agreement, and vowed to punish China for the way it devalues its currency against the dollar and to tax U.S. firms that move jobs overseas. He has also laid out plans to bring America’s creaking infrastructure up to 21st-century standards, a new spending pitch that has the potential to boost jobs — but which could also lay the seeds of higher inflation.

MARKETS MARCH ON

Trump’s victory did not cause the bottom to fall out of the stock market rally that’s been largely in place since 2009, when the world economy started to first claw out of its deepest recession since World War II.

In fact, both the Dow and the S&P 500 rallied to hit a series of record highs. Stocks have also benefited from a raft of big corporate deals this year — executives are seeing takeovers as a fast way to generate growth in what is otherwise a low-growth global economy disrupted by non-stop technological innovations.

Notable deals in 2016 included the announcement of an $85 billion merger of Time Warner and AT&T and the $57 billion takeover of Monsanto by Germany medicine and farm-chemical maker Bayer. The $100 billion takeover of SABMiller by Budweiser maker Anheuser-Busch InBev was also completed.

FED FINALLY DELIVERS

During his campaign, Trump criticized Federal Reserve Chair Janet Yellen, saying she should be “ashamed” of the way she’s run policy since taking the helm in 2014. A year ago, the Fed appeared set to follow up its first interest rate hike in nearly a decade with three or four more in 2016. But there was no move until Dec. 14, when the U.S. central bank raised its main interest rate to a range between 0.5 percent and 0.75 percent. Many factors explained its hesitation to raise rates, including unease over the global impact of China’s economic slowdown and uncertainty surrounding the U.S. election. But with the U.S. economy continuing to do better than most developed countries — with unemployment below 5 percent and inflation on the way up — the Fed finally delivered another hike. The markets are predicting another three or four increases next year. Those expectations have helped the dollar rally, especially as other major central banks persevere with super-loose monetary policies to breathe life into their economies.

CHINA’S KEY ROLE

As the world’s second-largest economy, China is playing a bigger role in the functioning of the global economy. Nowhere was that more evident than in the early months of 2016, when jitters over the scale of the slowdown in China caused wild swings in financial markets. Stocks took a pounding while commodities tanked, with oil skidding to 13-year lows, as traders factored in lower demand from resource-hungry China. The slump in commodities weighed heavily on economies like Australia that are big exporters of raw materials. China’s economy is ending the year in relatively good health as authorities try to pivot the economy’s focus from manufacturing to more consumer spending. But Trump’s promises to take a tough stance in trade will be of concern to Beijing.

OPEC TAKES A STAND

For the first time since December 2008, at the height of the financial crisis, the Organization of Petroleum Exporting Countries cut its production levels in 2016. November’s cut, soon followed by more cuts by non-OPEC countries like Russia, helped push oil prices sharply higher. At over $50 a barrel, benchmark New York crude is markedly higher than the near 13-year lows around $30 recorded at the start of 2016, when investors focused on high supply and concerns over an economic slowdown. The oil slump helped put several crude-producing countries into severe recessions, including Brazil and Venezuela, and even saw wealthy Saudi Arabia cut back on spending. The question for 2017 is whether OPEC — and non-OPEC — countries can deliver on their production promises. If they do and higher oil prices stick, that will push up inflation in the global economy.

IT JUST GRATES

One of the major reasons why popular sentiment has turned against governments has been a growing distrust of elites. Perhaps nothing illustrated the issue more than the “Panama Papers,” a leaked trove of data on thousands of offshore accounts that helped the wealthy, the powerful and celebrities shelter their cash from the taxman, often without breaking the law. Critics say these tax schemes are the core of a system that gives an unfair advantage to big corporations and the wealthy. Outrage grew in the U.S. when it was revealed that Wells Fargo employees opened up to 2 million bank and credit card accounts fraudulently to meet sales goals. Bank employees also allegedly moved money between those accounts and created fake email addresses to sign customers up for online banking.

It just grates.

Yellen: Case for interest hike strengthened

The case for a U.S. interest rate hike has strengthened in recent months because of improvements in the labor market and expectations for solid economic growth, Federal Reserve Chair Janet Yellen said today.

Yellen did not indicate when the U.S. central bank might raise rates, but her comments reinforced the view that such a move could come later this year. The Fed has policy meetings scheduled in September, November and December.

Speaking at a three-day international gathering of central bankers and academics in Jackson Hole, Wyoming, Yellen said the “U.S. economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability.”

Data released earlier on Friday, however, showed the economy was more sluggish than initially thought in the second quarter, with gross domestic product expanding at a 1.1 percent annual rate. At the same time, consumer spending, which makes up more than two-thirds of economic activity, grew at the fastest rate since the fourth quarter of 2014.

Yellen pointed to a recent rebound in employment and said the Fed expects the economy to continue expanding.

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said, adding that the Fed still thinks future rate increases should be “gradual.”

The Fed raised rates in December, its first hike in nearly a decade, but it has held off further increases so far this year due to a global growth slowdown, financial market volatility and generally tepid U.S. inflation data.

Yellen did not lay out a clear roadmap for what the Fed needs to see to raise rates. Investors have been doubtful about the central bank’s guidance, in part because its policymakers appear to be divided over whether to hike rates soon or take a more cautious approach.

“She’s just kept the door open for a hike sooner rather than later,” said Subadra Rajappa, an interest rate strategist at Societe Generale in Washington.

Prices for fed funds futures implied investors saw about even odds that the Fed will raise rates in December, largely unchanged from before Yellen’s remarks. Investors see much smaller chances of hikes in September or November.

The dollar jumped against the yen and euro on Yellen’s remarks before turning lower. U.S. stocks briefly pared gains, while prices of longer-dated U.S. Treasuries were trading higher.

Yellen noted that Fed officials have a wide range of views on where rates will likely be in the coming years. She said current forecasts imply a 70 percent probability they will be between 0 percent and 3.75 percent at the end of 2017, and a 70 percent probability they will be between 0 percent and 4.5 percent at the end of 2018.

Such uncertainty, she said, is inherent in the inability to predict economic shocks.

OTHER OPTIONS

Yellen was speaking at a Fed conference on designing new monetary policy frameworks, with central bankers eager to find new ways to stimulate economies even after they have cut rates to near zero and flooded banks with money.

She devoted much of her speech to outlining how the Fed may deal with future recessions now that many economists and Fed officials believe that an aging population and other dynamics appear to be slowing U.S. economic growth over the long term.

Because slower growth means future U.S. interest rates will likely also need to be lower on average, some analysts have suggested that the Fed will have less room to fight future recessions because there will be less room to cut rates.

Such a view is “exaggerated,” Yellen said, because the Fed will be able to use bond purchases and forward guidance to ease conditions. She said the Fed still planned in the future to wind down its massive balance sheet but that it would take time, adding that the balance sheet was likely to be useful for policy for some time.

The Fed may also want to explore other options, including broadening the range of assets it can purchase, raising the inflation target, or targeting nominal GDP, she said.

Reporting by Jason Lange and Ann Saphir; Additional reporting by Lindsay Dunsmuir in Washington; Editing by Paul Simao.