Open conflict at the Federal Reserve: Yellen losing control while the world stares at recession?

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Depending on the moment the Federal Reserve Chair can be the most powerful person in the world. That title usually rests with the President of the United States, but on occasion it can shift to the Fed chair. Most people don’t know this. And right now it sounds like there is a bit of a leadership struggle at the Federal Reserve. There is open dissension in the ranks of the Federal Open Market Committee (FOMC). It is unusual to see this kind of conflict at the Fed played out publicly. What is going on?

Primarily the concern it seems is that though the employment rate keeps going down we are seeing little pressure on prices upward. According to standard (these days) economics full employment, and we are at 5% unemployment officially, should pressure price inflation. But it has not. Why?

Some believe, including your editor, that one of the main reasons this is the case is because the jobs number is basically bogus. It’s a political number. The reason the unemployment rate keeps going down is because people keep falling off the unemployment rolls. If one can no longer obtain unemployment payments because one has exhausted one’s allotment of payments one is no longer counted in the data. There are also many people who are employed but are being paid at lower rates than they were prior to the 2008 Crash.

In other words, we may not technically be in a recession but we are still very hung over from the Crash. And now we are looking at a global slowdown. Some in the FOMC are particularly concerned by this and are jumping up and down in an effort to keep Janet Yellen from making what they see as a potentially costly mistake. (Or perhaps this is what they want the world to think.) They fear that Yellen might actually raise rates just a bit.

That an increase in the Federal Funds rate of .25% elicits this kind of reaction from some in the FOMC is pretty remarkable. Just how fragile is the current economy? Sounds like it’s pretty fragile. (We know it’s fragile. But people are starting to acknowledge it now.)

And we can’t help but think that the upheaval at the Fed is at least influenced by the overall state of the Fed chair who gave a speech at UMASS recently and went silent at the podium for 20 seconds.

As we asked before, what happens if we enter an official recession from a level which is still lower than where the economy was pre-2008? The political implications domestically and internationally are immense.

(From The Financial Times)

Renewed uncertainty over the Fed’s intentions will do little to allay concerns in emerging markets, where policymakers have become frustrated by its apparent indecision on when to raise dollar borrowing costs. A further delay would also add to pressure on the European Central Bank and Bank of Japan to offset a weaker dollar with additional quantitative easing of their own.

Moody’s senior economist Ryan Sweet said the “discordant” rhetoric was significant. “Yellen has time to forge a consensus but airing the officials’ disagreements publicly can have unintended consequences,” he wrote.

Coming after a dismal jobs report, interest rate futures now imply that investors see an even chance that the Fed keeps rates at their historically low levels until March, according to Bloomberg data. “It’s easy to second guess the Fed’s decisions, but the data have been defending the Fed’s decision to wait on rate hikes,” said Brian Jacobsen, a strategist at Wells Fargo Funds Management.

Click here for the article.