After a smooth hearing in front of the Senate Banking Committee Janet Yellen is expected to be confirmed later this month by the full Senate as the 15th person and first woman to serve as Chair of the Federal Reserve. Yellen would officially take the job when current Chairman Ben Bernanke’s ends his controversial eight year run on January 31st. Yellen was one of the architects behind Quantitative Easing leading some to wonder what her appointment says about when (if?) QE comes to a close.
In the attached clip Peter Kenny says even the dovish Yellen will have to reduce, if not end, Quantitative Easing outright. Kenny argues Yellen is the perfect person to nurse the economy through QE withdrawal. “She’s precisely the person who could validate this switch in policy,” Kenny says. Given her advocacy of stimulus “she comes from a position of authority in saying it’s now time to start tapering.”
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There’s no shortage of economists who would welcome an immediate end to all stimulus. The Fed’s bloated balance sheet has been wildly inflated over Bernanke’s tenure. While running the economy via monetary policy rather than sustainable fiscal strategy has been an interesting experiment, the history of money printing suggests it’s better to go off too early rather than waiting for rampant inflation to finally kick into gear.
Like it or not, QE has been a boon for stock prices. Holding interest rates near zero has the effect of reducing the appeal of almost every investment except stocks. Low yields have driven more than 100% returns for the stock market since the 2009 lows, and a failure in terms of growing the job base or stimulating the economy QE has been utopia for equity investors. From that perspective any change from the present policy almost has to be a negative.
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“Certainly there will be some volatility,” concedes Kenny, “but you’re still seeing equity performance that is based largely on earnings. This is not a bubble in equities.”
It may not be a bubble, but one man’s volatility is another’s crash. After spending the last two years of Bernanke’s tenure without so much as a 10% dip the bull market is going to miss Helicopter Ben more than most traders would like to admit.
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