Pictet Wealth Management: Thoughts on Janet Yellen at Treasury
Thomas Costerg, Economist US Senior Pictet Wealth Management.
More Biden appointments are trickling in, and news circulated that the next Treasury Secretary will be Janet Yellen, former Chair of the Federal Reserve. The formal announcement should take place today.
Yellen is remembered for her activist and dovish monetary policy: her signature focus was on the underlying fragilities of the US labour market, which in turn justified continued monetary policy accommodation. A strong Keynesian, she has persistently called for more fiscal stimulus -- and even more so recently as Congress is wavering about additional aid in a context of ‘benefit cliff’.
Some may see in this appointment, and especially the game of ‘musical chair’ between the Federal Reserve and the Treasury, as another acceleration to the move to Modern Monetary Theory (which calls for the end of the central bank, rates at zero, and money-printing done by the Treasury not the Fed). This said, the correct answer is ‘not so fast’ since Yellen does not believe in MMT (she’s still a traditional Keynesian), and also she’s demonstrated little appetite to engineer such an institutional ‘big bang’ that MMT envisages, in fact she’s a strong defender of central bank independence.
Still, it is true to say that it’s further step in the direction of close cooperation between the Treasury and the Fed, although this close coordination already exists and was further cemented during the Covid19 shock.
The Fed-Treasury relationship has soured very lately as Secretary Mnuchin ‘pulled the carpet’ (the credit guarantees) under the Fed’s credit easing facilities, but to Mnuchin’s defense, these facilities had been under-used and they can be reallocated swiftly to help extend the federal unemployment benefits (it is easier to reallocate funds that to vote for new funds). We are not particularly alarmed about this micro-event, in short.
From a policy perspective, we continue to expect: from the Federal Reserve, Operation Twist in December (maturity extension of of existing Treasury portfolio) and more monthly asset purchases in the first quarter (i.e. likely increased to 160bn per month from 120bn currently) – despite potential encouraging news on the vaccine side. It’s our fundamental view that the Fed is now as much as managing the business cycle as it is managing the economy’s high debt burden – in particular the federal debt. In our view, we are in ‘soft MMT’ mode, with implicit and indirect but nevertheless important partial monetization of the budget deficit. The Fed is implicitly capping long-term yields.
At the Treasury level, Yellen’s first key job will be to negotiate with Senate Republicans to get a stimulus package out of the door, but we continue to believe Yellen might struggle to extract more than 500 to 750 billion. In other words, we might not get the Democrats’ 2 trillion package. Good news is that $500bn may be enough from a macro perspective to avoid a sharp hit to consumption in Q1 2021 (and a negative Q1 GDP print). We expect 500bn of stimulus to represent a potential support to quarterly GDP to the tune of 5%.
Looking further ahead, the question is whether the Treasury and the Fed will get even more creative in the next recession, going into riskier assets such as buying equities. We cannot entirely rule out such creativity given all the new developments and what happened during the Covid19 shock. At the margin, a Yellen appointment makes equity-buying in a severely stressed environment a tad more likely.
Regarding Jerome Powell, we think that he could be reappointed as Fed Chair before his term expires in January 2022, especially as such nomination could be part of a bargain with Senate Republicans. Powell has not only embraced the historic dovishness of the Fed inherited from Ben Bernanke, but he has even pushed it further with the new “average inflation targeting” strategy unveiled in August (which to us is the tree that hides the forest of a broader ‘soft MMT’ mode).
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