Setting Expectations

Janet Yellen (left). Photo courtesy of US Dept of Treasury.

Janet Yellen (left). Photo courtesy of US Dept of Treasury.

Last week at the Federal Reserve conference in Boston, Janet Yellen began the process of preparing us emotionally for high inflation. In her jargony, government-speak, she said that running a “high pressure” economy may be called for.

Translation: buckle up, because it’s gonna get real bumpy up in here.

Whatever your view of the Fed (pillar of US financial strength or babbling bunch of blowhards?) one fact is unassailable: they’ve piloted us far into uncharted waters. In the years before and after the Global Financial Crisis, we’ve seen unprecedented US currency creation and expansion in The Fed’s scope of operation.

While in Boston, Yellen said a few other things that support this notion. She called upon economists to study what Fed interest rate policy and financial oversight can do to reduce the frequency and severity of future crises, and to contemplate why the influence of labor-market conditions on inflation seems to be weaker than had been thought before the financial crisis.

Really? Ms. Yellen, the Fed created trillions of US dollars out of thin air, handed a huge pile of them to the big banks without meaningful terms, and you’re asking these questions NOW? I’m sensing you may be a little confused about what your job actually is.

Yellen also said more study was needed on how the Fed could influence expectations of future interest rates and inflation. And now we’ve come to the heart of it. Yellen and her colleagues really don’t have any idea what’s going to happen next, but in an effort to preserve what thread of confidence the world may have left in them, they’re trying to prepare us for a sharp decline in the purchasing power of our dollars. They are sales people for the government, and they’re setting expectations for high inflation.

All this while telling us there is no inflation right now, so don’t look for a COLA increase in your Social Security benefit this year.

I just read two articles on how far the labor market has tightened and how Wal-Mart is raising non-managerial employee pay 16%. I’m no economist, but I’m pretty sure that’s an indication that there is a little inflation. By the way, nobody I’ve talked to about this believes there is no inflation.

Commodity prices fell off a cliff in 2014. Yes, this is an indication of a deflationary trend. However, while the global economy has clearly stagnated, the US economy and financial markets have remained remarkably resilient, and we’ve staved off the next recession for much longer than would be expected, statistically speaking.  But don’t kid yourself.  The fact that it hasn’t blown up yet is not evidence that The Fed is in control of the situation.  Au contraire, thanks in large part to their policies, we could conceivably end up with two for the price of one, deflating financial asset prices and decreasing currency value.

While deflation is a major concern, in the economy and especially in the financial markets, inflation, or put in real terms, the decline in purchasing power of our currency, also remains a palpable concern. At least for me it does. Even if not so much for The Fed. Janet doesn’t have to set my expectations.