Friday, July 25, 2014   




Between a hawk and a dove

Friday, March 21, 2014


Janet Yellen, in her first meeting as the chairwoman of the US Federal Reserve, signaled she is not an inflation dove.

In the post-meeting media conference she hinted that interest-rate hikes might come about six months after the end of the bond-buying program, if the situation is right.

Speculators, however, are fixated on just three words - "about six months." Yield on US 10-year Treasury notes rose nearly 0.096 percent while the Dow Jones Industrial Average fell nearly 1 percent the moment the comments were made but recovered toward market close.

But the unprecedented super-easy monetary policy has to end someday somehow. Yellen may not be a hawk but she shouldn't be mistaken as a dove either.

Back in the mid 1990s when she was a Fed freshman, she urged legendary chair Alan Greenspan to tame the stock market bubble by raising short-term interest rates.

If Greenspan was not a dove, Yellen should not be seen as one either. Even her predecessor Ben Bernanke denied that he was a dove. At the beginning of his term he tightened Fed policy to fight the housing bubble. Bernanke succeeded, and the rest is history.

Is there a stock market bubble? There is unfortunately no objective measure or definition of speculative bubble.

But as the saying goes - I know it when I see it. In a speculative bubble, there are obsessive worshippers who will not only put their soul and money into what they believe, they will also debate and even hate non-believers.

Common stocks
may be pricey but I have yet to see an irrational religious-like phenomenon in the stock market. Having said that, that is not the reason why Yellen et al should keep on buying bonds and keep interest rates low.

Yields on treasuries of longer maturity have already been reflecting that inflation expectation is on the rise. The housing market has recovered though it may take longer for some areas to adjust. There is also a bipartisan effort to reform Fannie Mae and Freddie Mac. These are all signs that the US market is on track toward normalization.

The challenges for Yellen are more than tapering and raising interest rates.

She has to maneuver the withdrawal so institutions used to being on life support for years can live without it.

She has been a strong advocate of tougher risk controls at financial institutions and these non- quantitative measures may have more profound implications down the road to recovery. Simon Lee is a business consultant


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