This Week's Forecasts & Trends E-Letter
Janet Yellen’s Surprising Warning Of "Secular Stagnation"
April 14, 2015
Speaking at a monetary conference hosted by the Federal Reserve Bank of San Francisco on March 27, Fed Chair Janet Yellen warned that the US economy might be facing “secular stagnation,” a prolonged period of below-trend economic growth or no growth at all.
While emphasizing that secular stagnation is not the Fed’s most likely scenario, Ms. Yellen nonetheless believes that it is a risk important enough to warn her colleagues about. Secular stagnation is where Japan has been for most of the last 20 years. Given that, we should spend some time today and subsequently discussing this phenomenon and what it means for the economy should it rear its ugly head.
Following that discussion, we will take a look at the minutes from the March 17-18 Fed Open Market Committee (FOMC) meeting that were released last Wednesday. Those minutes described how the Committee decided to drop the word “patient” in its forward guidance as to when the central bank might decide to raise the Fed Funds rate this year.
The minutes are abundantly clear that there is widespread disagreement among the Committee members as to when the key lending rate should be increased. Some members still believe that “liftoff” should occur at the June meeting, while others prefer waiting until the September meeting, and still others think the Fed should wait until next year. I continue to believe the first rate hike will not occur prior to September of this year, if at all.
Finally, President Obama and Congress have an opportunity to help the US economy significantly in the weeks ahead. Two very important international trade agreements are on the table, and both should be passed in my opinion. The Trans-Atlantic Trade and Investment Partnership and the Trans-Pacific Partnership could create hundreds of thousands of new full-time jobs and over $100 billion in new exports each year. Let’s hope Congress passes both and Obama doesn’t veto them!