Fed Chief Yellen’s Many Caveats

To the careful observer, there were more caveats in Fed Chief Janet Yellen’s testimony before the Joint Economic Committee of the U.S. Congress yesterday than there are potholes in the D.C. region following the harsh winter’s weather.
Her phrases like “very disturbing” and “highly unusual” were glossed over by her quasi-optimistic overriding projection that the economy is slowly, very slowly, on the mend. Yet it was unmistakeable that she included sufficient sign posts that the whole thing could lurch south in a big hurry.
To start with, let’s take the common excuse for the zero growth in the national economy in the first quarter. It’s blamed on the rough winter. Easy enough to write off with that explanation, right?
Yet, the lead headline in yesterday’s Washington Post, which one would assume most in that Capitol Hill hearing had at least browsed earlier that morning, read, “Study: Climate Risks Growing.” Darryl Fears’ story began, “The government’s newest national assessment of climate change declares that increased global warming is affecting every part of the United States. The report released Tuesday cites wide and severe impacts: more sea-level rise, flooding, storm surges, precipitation and heat waves in the Northeast; frequent water shortages and hurricanes in the Southeast and the Caribbean; and more drought and wildfires in the Southwest.”
So, if the weather is blamed for the flat-lining of the U.S. economy in the first quarter, then why shouldn’t we expect the same for the current quarter, or ones going forward? Nope, as an excuse the weather simply won’t work any more.
Then there are other factors that Yellen commented on. In response to a question from U.S. Senator Amy Klobuchar (D-Minn.) about the growing disparity between the super-rich and the rest of us (the wealthiest 400 own as much wealth as the entire bottom 50 percent), Yellen concurred with the data and called it “a very disturbing trend” contributing to the weakness of the economy. The factors responsible run deep in society, she said, especially since the mid-1980s (aka the Reagan era).
Another nagging and related problem Yellen cited is the percentage of the unemployed in the U.S. who are now “long-term unemployed.” These now constitute 35 percent of the total unemployed, and as a percentage, she said, is “highly unusual.” That also doesn’t count the many Americans who’ve dropped off the stat sheet because “they’ve fallen out of the labor force” altogether by virtue of no longer seeking work.
Then, there’s another major factor that Yellen said could call off all bets, and that is the fact of “international destabilizations.”
So, let’s see, any chance of that? How about the increasingly robust efforts by both Russia and China to extend their grab for natural resources? Whatever Western intelligence operations may have been afoot in the coup in Ukraine that turned it toward the West recently, Putin and the extensive pro-Russian indigenous population in Ukraine have not been taking it lying down.
Then there is China’s new aggressiveness in its region, with clashes in the South China Sea and elsewhere trending to get far worse before they get any better. China’s inability to maintain double-digit rates of growth could also begin to wreak havoc on world markets, as some forecasters are predicting.
Then there is the inherent dangers of “bubble territory” in some domestic U.S. markets, and their potential to pop in very economically destabilizing ways.
Finally, Yellen referred yesterday to the volatile domestic housing market. Housing has “flattened out,” she observed, citing among other reasons the fact that young people are more and more living with their parents as student loan burdens coming out of college prevent them from qualifying for mortgage loans. But in this “new normal,” a housing rebound is needed for an economic recovery, she said.
Yellen made it clear that the economy is hardly “normal” now, still requiring exceptional intervention from the Fed to avert dire consequences. It will be some time, she said, before “the economy will function normally.” Currently, as inflation rates remaining stubbornly below target levels, “new headwinds” threaten to slow down the economy further, she cautioned.