While the rest of the world hung on Janet Yellen‘s every word last week for news of the future of the Federal Reserve‘s policy of quantitative easing, her real bombshell came at the end of her press conference and was largely ignored by the media who had rushed to release their pre-written narratives.
The media and Wall Street, in their hope for eternal quantitative easing, focused on Yellen’s comments about accommodative monetary policy and how it might take until the end of the decade for the Fed to shrink its balance sheet back to normal levels. They ignored the above statement, coming as it did near the end of the press conference, that acknowledged that the economy has not yet recovered. Six years of Federal Reserve intervention, nearly $4 trillion of balance sheet expansion, and a 45% increase in the money supply (M2 & MZM), and the Fed is hoping that the economy might recover two years from now? How many more trillions of dollars will be doled out to Wall Street before the Fed admits that it has hurt, not helped, the recovery?
Yellen’s statement also requires a bit of parsing. When she said “in 2016 or by the end,” did she mean by the end of 2016 or by the end of the decade? Given her view that full policy normalization won’t occur until the end of the decade, the latter interpretation would not be at all surprising. This would mean that the Fed believes that we are still at best only at the halfway point toward economic recovery. The last financial crisis recovery that took that long was the recovery from the Great Depression, in which the economy really didn’t return to normal until after World War II. How many American households can deal with another six years or more of middling economic performance?