Analysis

Yellen swan song reveals confidence in North American economic future: Don Pittis

Rather than carping at Donald Trump or her successor Janet Yellen was upbeat. But Canadian borrowers should watch out for much higher interest rates.

No recession and more jobs ahead, but Canadians should watch out for significantly higher interest rates

Outgoing Federal Reserve Chair Janet Yellen chuckles at a reporter's humorous question at her final press conference where she said the global economy is seeing a synchronized expansion. (Jonathan Ernst/Reuters)

Her final press conference as Federal Reserve Chair could have been an opportunity for Janet Yellen to slam the policies of President Donald Trump and point out everything that was going wrong with Trump's America.

Certainly reporters gave her lots of opportunities.

Instead, the outgoing central bank chief brimmed with confidence for the economic state of the nation.

Performing well

"Look, at the moment the U.S. economy is performing well," Yellen told reporters. "The growth that we've seen is not based on, for example, an unsustainable build-up of debt as we had in the run up to the financial crisis."

The mention of debt may be a sore point for Canadians. Part of Yellen's optimistic picture for the U.S. economy is a need for what she described as a "gradual" rise in interest rates. Most experts say Canada must eventually follow suit.
While Yellen expects the North American economy to stay strong Canadians with large mortgages must face the possibility of repeated interest rate increases. (CBC)

While Yellen only announced a single quarter point increase in rates to 1.25 per cent effective immediately, she and her colleagues expect that rate to rise above three per cent by by 2020.

Canadians with long-term mortgage debt must face the fact that those "gradual" rate rises will mean finding the money to cover an increase of two full percentage points in annual interest rates.

Synchronized global expansion

If Yellen turns out to be justified in her optimism, a much stronger North American economy will help those borrowers cope. Because the current wave of economic strength is not just a U.S. phenomenon.

"The global economy is doing well. We're in a synchronized expansion," said Yellen. "It's the first time in many years that we've seen this."

While she admitted that lower-than-expected inflation and a low pace of wage growth are troubling, she seemed convinced that they are a passing phase.
Yellen says the U.S. labour market is getting tighter, forcing businesses to hire people with skills that don't quite fit and then train them. (Brian Snyder/Reuters)

"I feel good that the labour market is in a very much stronger place than it was eight years ago," she said, citing the 17 million jobs the economy has created and an unemployment rate that means new entrants to the workforce are being gobbled up.

She and her panel of advisers projected an even lower jobless rate of four per cent, which is forcing employers not to merely look for qualified workers, but to train the ones they need.

"I feel very pleased when I hear anecdotes from firms that they are having trouble finding workers and they talk about, given that, they're taking on people with skills that don't quite match what they want and training them," Yellen said. "I think that's a development that is a natural one in a strong labour market that tends to build human capital and worker skills, and that is a strong positive." 

Trump effect

Asked repeatedly about the impact of the latest round of U.S. tax cuts, Yellen remained sanguine. Pointing out that tax and fiscal policy was up to the president and Congress, she said any increase of economic growth it caused was a good thing, and that managing the monetary impact of such growth was well within the Fed's power.

The closest she came to criticism of the tax policy was to express concern about rising government debt levels and how difficult it would be to mitigate future economic trouble with fiscal spending. The piggy bank will be empty.
U.S. President Donald Trump is promising 4% growth, which Yellen described as 'challenging.' (Kevin Lamarque/Reuters)

One reporter mentioned that during Yellen's hour-long Federal Reserve media conference, speaking elsewhere, Trump had restated his promise of four per cent growth.

She politely pointed out that reaching such growth levels would be "challenging."

Leaving on a high note

Asked about two other bogie-men threatening the economy, a sky-high U.S. stock market and bitcoin, she saw both as relatively benign.

In high stocks there was "nothing flashing red there or even orange," she said. And while many bitcoin speculators could lose their shirts, there were no signs a bitcoin crash would hurt core banking functions.
Yellen departs at the end of her final monetary policy news conference where she left with an optimistic message. (Jonathan Ernst/Reuters)

She played down another worry frequently mentioned by commentators looking out for trouble ahead. That is the so called "flattening yield curve" where short-term interest rates rise relative to longer-term rates. The moment when short rates exceed long rates — called "an inverted yield curve" — is supposed to signal recession.

Yellen insisted that with rates so low for so long there are different forces at work, and that she and the rest of the committee of advisers say the odds of recession are low.

"There's less to lose sleep about now than there has been for quite some time," said Yellen which is certainly a good way to end a successful term as the world's most powerful central banker, and a nice way for the rest of us to head into the holiday season.

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About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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