Thank goodness for the calming effect of U.S. Fed chair Janet Yellen as she testified to Congress Wednesday.
And thank goodness it is a level-headed Yellen in charge of the world's most influential central bank, and not members of Congress, most of whose questions seemed either irrationally hostile or utterly irrelevant.
- Fed not currently considering negative interest rate policy, Yellen says
- North American stock markets search for direction
In the face of growing over-excitement in the world's financial markets, Yellen was, in her practical way, able to make a strong case that the United States is not going to hell in a hand-basket and that its central bank is in safe hands.
The issue, raised by some of her congressional questioners, is whether Yellen's quarter-point rate increase in December — the first after seven years close to zero — came too soon.
The sentiment echoes a number of market commentators who fear the U.S. may once again be heading for recession.
Trouble overseas, especially currency uncertainty in China, may be causing increased "headwinds" for U.S. growth, Yellen said, but she was in no mood to backtrack on her pledge to gradually increase interest rates over the coming year.
Unperturbed and merely stating the facts during her semi-annual report to Congress, she was convincing.
Yellen conceded that a decline in drilling was a drawback for the industrial economy, but dismissed the idea that damage to the oil sector due to falling prices was having a disproportionate effect on employment or the wider economy.
"The fact is that the energy sector is very hard hit," said Yellen. "But with respect to employment, it's a pretty small sector of the workforce overall."
While she may be sympathetic to job losses by individual workers — or as several members of Congress suggested, to high unemployment levels amongst minority groups — the levers Yellen controls are macroeconomic.
As she had to repeat, her concern is employment and inflation in the overall economy. She has no mechanism to decide which individuals get the jobs.
What's more, as she and others pointed out, the U.S. unemployment rate has fallen to five per cent — a level last seen in late 2007 before the global financial crisis took hold — and wages are rising.
While several congressional members argued that five-per-cent unemployment is not an accurate measure of true joblessness, it is the same statistic used in 2007 and is measured in the same way.
Yellen also made it clear that the falling price of oil was a good thing for the average American household, increasing annual spending power by $1,000 due to cheaper gasoline, heating fuel and transport costs.
That's good for the economy.
Inflation not dead yet
Falling oil prices also explain Yellen's logic for why inflation is far from dead and will therefore require further interest-rate increases.
The cost of energy is embedded in every product Americans consume, from produce grown using tractors, to goods shipped across the U.S. and from around the world. Every time oil and gas prices fall, the price of nearly everything is less than it would have been otherwise. In other words, falling oil prices constrain inflation.
A growing number of analysts say oil could fall further yet, but we are reaching the limit. And prices don't have to rise to end their disinflationary effect — they just have to stop falling.
At that point, Americans will begin to see the full impact of inflationary price increases.
Yellen appeared to backtrack on one point, though: negative interest rates, recently adopted by Japan and previously used in Europe.
In past media briefings, the Fed chair has mentioned negative rates could be part of a toolkit of emergency options if the U.S. economy went into recession. This time she was far more equivocal.
"I am not aware of anything that would prevent us from doing it, but I'm saying we have not fully investigated the legal issues," she said. "That still needs to be done."
Wary of negative rates
Some analysts are blaming renewed fears in the European banking sector on negative rates, which can distort traditional banking in unpredictable ways. One concern is banks should not expect depositers to accept negative rates, thus squeezing banks between the official negative rates, and the money paid out to depositers.
Europe and Japan are in very different circumstances, one with high unemployment and the other plagued by deflation. But both circumstances are quite different from the U.S.
Yellen said the Fed would be cautious with negative interest rates and, in light of the experiences in other countries, it was something the U.S. should simply examine.
"Not because we think there is a reason to use it," she testified.
"Could the plumbing of the payments system in the United States handle it?" said Yellen. "We've not determined that."
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