It’s been three and a half years since Janet Yellen assumed the role as chair of the Federal Reserve bank. What has the Yellen bank tried to achieve over this period? And has it in fact achieved what it said it would?

Bernanke-Yellen Indulge the Children: The Taper Tantrum

One of the first tasks of the Yellen Bank, which began in early 2014 with Yellen assuming the chair of the Fed that February, was how to respond to the Taper Tantrum that arose in the preceding spring 2013 when Bernanke was still at the helm of the Fed. Should the Yellen bank embrace the Bernanke bank’s response as it was? Slow it? Abandon it? Or accelerate it?

‘Taper’ refers to the reduction in stages of the Fed’s rate of massive money liquidity injections of 2009-12 created by the QEs and ZIRP programs. ‘Tantrum’ refers to the negative reaction by offshore emerging markets, US and global investors who had committed heavily to those markets, as well as US multinational corporations (MNCs) that had shifted investment and production to the EMEs.

The Fed gave the first indication it might taper in May 2013. This was officially confirmed by Bernanke’s press conference in June 2013, when the Fed noted it planned to start ‘tapering’ its QE3 bond buying program later that year. QE tapering also strongly implied that once QE3 had been ‘fully tapered’ it was likely the Fed would next begin raising interest rates from the excessively low 0.1% federal funds rate that had been in effect from the summer of 2009.

Even though the inflation level in 2013 was projected to rise to only half the 2% official Fed target, in his press conference Bernanke nevertheless forecast that prices would rise to 2% by early 2015 due to accelerating US GDP and growth driving prices higher. According to Bernanke, US GDP would rise 2.6% in 2013 and accelerate to an extraordinary 3.6% in 2015. The faster real growth and rising price level were cited as justification for beginning the ‘taper’. The forecasts for both price level and GDP growth would of course prove grossly inaccurate. The price level in 2013 would rise to only 1.4% and even lower to 0.6% in 2015. GDP forecasts would prove even worse, with 1.7% growth (not 2.6%) for 2013 and 2.6% (not 3.6%) for 2015. But such failed forecasting was hardly new for the Bernanke Fed.

The prospect of a tapering of the QE3 $85 billion a month in liquidity injection, followed by a possible further reversal of the Fed’s zero rate program (ZIRP), set off a mini-panic among global investors, especially those betting on offshore emerging markets and by US MNCs, as well as by EME governments and domestic producers. But it was investors and MNCs that raised the loudest cacophony of protest and alarm.

Since a large part of the Fed’s massive liquidity injections from QE and ZIRP after 2008 had flowed out of the US and into the EMEs, contributing significantly to financing the global commodity boom and China’s economic growth surge of 2009-12, US and global investors betting on offshore markets and MNCs located in the EMEs potentially had a lot to lose from a ‘taper’. The Fed’s QE and ZIRP programs had a lesser impact on the US economy due to the outflow. As a Forbes business source admitted in 2014, “The data show a very strong correlation between the level of gross inflows to emerging markets since 2009 and the size of the Fed’s balance sheet. A simple regression for the 2011-13 period suggests that for every billion dollars of QE, flows to major emerging market economies like the BRIC countries rose by about $1.4 billion.” Rising Fed rates thus threatened continued money capital outflow to the EMEs, with potential major negative consequences for both financial and real investment profits for investors and MNCs..

The beginning of the end of ‘free money’ would raise the credit costs of investing in EME markets and thus reduce profitability. For US MNCs directly producing in the EMEs, their costs of imported resources and other inputs needed for production in their EME facilities would also rise while their prices received for exporting their finished products simultaneously declined due to EME currency decline. MNCs planning to repatriate their EME profits back to the US parent company would also experience a paper profit decline due just to the exchange rate effect. Converting profits in foreign currency to the rising dollar would result in less dollar-denominated profit. Declining EME currency exchange rates were thus decidedly bad for MNC profits. For US and global investors who had invested heavily into EMEs financial markets’ expansion in 2009-12, profitability would be reduced further as the rise in US rates inevitably translated into a rising US dollar and declining value of currencies of those EME economies; their profits too would be reduced for those planning to ‘repatriate’ earnings back to their US accounts. And for those US and global financial speculators who had invested heavily in EME financial markets and planned no ‘repatriation’, collapsing EME currencies nonetheless would register a corresponding collapse of the value of their financial investments in the EME stock and bond markets. Rising rates in the US might also provoke a retreat of stock and bond prices in US financial markets, offsetting the prior QE-liquidity escalation effect on US financial asset prices. In short, a good deal of money might be lost for broad sectors of US investors and producers as a consequence of a Fed ‘taper’ of QE followed by a rate hike.

EME domestic producers and investors would of course also experience profits compression due to rising import inflation, exports revenue decline, domestic stock, bond and foreign currency exchange market losses, etc. Their EME governments would have to deal with growing problems of capital flight and slowing economies resulting in unemployment, declining government tax revenues, and rising government deficits. Ultimately, in the worst case scenario, they would be unable to borrow from advanced economy bankers and investors to cover their rising deficits, or borrow at ever rising costs. The potential for government debt defaults might eventually become more serious in turn.

But it was US investors and MNCs, who together represented a powerful interest group that reacted negatively most strongly to Bernanke’s proposal to slow liquidity and thus raise rates. While EME governments and their domestic producers raised complaints to Washington in the wake of Bernanke’s announcement, louder still were the complaints by US multinational corporations (MNCs) that had moved operations and production to the EMEs, beginning with Reagan policies promoting offshoring of manufacturing and the expanding of US foreign direct investment (FDI) abroad under Clinton, Bush and Obama’s free trade policies.

It is incorrect therefore to describe the taper tantrum as purely a response by EME governments and producers. The Fed no doubt cared less about the losses that might be incurred by EME producers and their governments than about the political pressures that US MNCs and investors might exert on the Fed, through their friends and lobbyists in Congress and the US government. Complaints were already beginning to rise about Fed policies and calls for ‘reforms’ of the Fed itself during Bernanke’s term.

The mini-panic over just the potential of a liquidity reversal by the Fed resulted in Bernanke quickly backtracking on his trial proposal to begin reducing liquidity and raising rates. The taper proved mostly Fed talk and no action. The Fed continued its buying of both mortgage securities and US Treasuries under the QE3 program through Bernanke’s term, including after June 2013. The bond buying would continue unabated under Yellen after February 2014 until the end of that year. QE3 would not be suspended until December 2014. And it would be another full year before the Yellen Fed would even begin to test raising the federal funds rate, with a minimal 0.25% rate hike in December.

The decision by the Bernanke and Yellen banks to indulge investors and MNCs by not ending liquidity injections via QE for another 18 months after June 2013 is illustrated by the following Fed purchases of Treasuries and mortgage securities during that period:

Fed QE3 Purchases After Taper Announcement

Type of Security June 2013 February 2014 December 2014

Mortgages $1.3 trillion $1.5 trillion $1.7 trillion
US Treasuries $1.9 $2.2 $2.4

The EME taper tantrum by investors, MNCs, and EME governments and producers continued nonetheless throughout the remainder 2013, until it became clear the Fed was not going to discontinue QE or raise rates under Bernanke. Long-term US bond rates, an indicator of the tantrum, rose in 2013—and EME currency declines, capital flight, and financial markets stress continued. Once Yellen was made Fed chair, within weeks it was clear even to EME investors that their fears over the taper were unfounded. By spring 2014 EME currencies again began to rise; money capital flight reversed and began flowing back into the EMEs once again—all but reversing previous trends of 2013.

The taper tantrum was thus a tempest in a teacup. Neither the Bernanke nor the Yellen Fed ever had any real intention of quickly reducing the massive US central bank liquidity injections in 2013 or 2014. Nor any intent to soon begin raising Fed rates. Their real intent was to boost US stock and bond market prices ever further. That meant continuing to inject liquidity by increasing the money supply. Even when the QE bond buying program was halted in December 2014, Bernanke/Yellen planned to keep interest rates otherwise near zero for an extended period. It was no longer necessary to have both QE and ZIRP to do so. Traditional Fed bond buying tools were sufficient after 2014 to ensure US interest rates remained near zero and free money kept flowing to banks and investors—i.e. to keep prices rising in financial asset markets while ensuring an undervalued US dollar aided US exports.

The primary Fed strategy under both Bernanke and Yellen has been, and continues to be, to keep interest rates artificially low by a steady increase in liquidity to banks and investors. Low rates would subsidize US exports by ensuring an undervalued dollar, while simultaneously providing ‘free money’ for investors to pump up stock and bond markets. The Fed assumed that some of the surging stock and bond prices would result in a spillover effect into real investment in the US. That was how economic recovery was primarily to occur. And it was acceptable that for every four dollars going into financial asset investment and capital gains, perhaps one dollar would result in real investment expansion. At least some liquidity would maybe find its way into creating real goods and services; that was the Fed logic.

That logic summarizes the essence of 21st century capitalist central bank monetary policy: flood the financial markets with massive excess liquidity in the expectation that some of the escalation in stock and bond prices will overflow into real investment; simultaneously, the excess liquidity will also reduce currency exchange rates, thereby subsidizing export costs, and boosting real growth by expanding exports and real GDP as well. The problem with this ‘monetary primacy’ strategy, however, is that most of the boost in financial asset values results in corporations issuing bonds to fund their stock buybacks and shareholder dividend payouts. Or it results in diversion of liquidity by investors that borrow to invest in financial asset markets easily accessible worldwide. Or it ends up as cash hoarding of the excess liquidity on institutions’ and investors’ balance sheets. Very little spills over to real investment. Nor does it boost exports in a global economy characterized by slowing global trade overall. The excess liquidity flows into multiple forms of debt and non-productive financial asset investment or accumulates on the sidelines.

These actual developments mean central banks and monetary policy have become the new locus for a 21st century form of competitive devaluations. While in the 1930s nations engaged in competitive devaluations, amidst a slowing global economy, in a futile effort to obtain a temporary export cost advantage over their competitors as a means to grow their real economies, today it is central banks that drive the competitive currency devaluations process via QE, ZIRP, and massive liquidity injections.

Add to this futile money supply-driven export strategy the financialization of the global economy, and the central bank liquidity injections result in slowing real asset investment. Just as central bank money policies fail to boost exports due to competitive devaluations, so too do central bank-provided free money flows. Financial institutions increasingly divert the liquidity from real investment into their global network of shadow banks, their proliferating financial asset markets, and their ever-growing financial securities products.

The 21st century capitalist economy is reflected in a similar financialization of government and the capitalist State, which ensure the implementation and administration of the strategy. Bankers and investors prevent government from introducing alternative fiscal policies in order to ensure they enrich themselves first and foremost through a central bank monetary strategy for economic recovery. Making central bank monetary policy primary is far more profitable to their interests than a ‘fiscal government spending’ strategy. The latter results in a ‘bottoms up’ stimulation of the real economy and real investment first, with subsequent boosting of financial asset prices and markets as an after-effect and consequence of real economic growth.

The Yellen bank thus represents a continuation of the Bernanke Fed in terms of liquidity injection and excess money supply generation. QE may have been suspended under Yellen, but the schedule for such had already been intended under Bernanke. Moreover, the nearly $4.5 trillion of QE-related liquidity still sits on Yellen Fed balance sheets as of mid-year 2017—more than 8 years after the Fed embarked on its QE experiment.

QE is therefore just a tool to inject especially excessive liquidity quickly into the economy, accompanied by other radical Fed measures post 2008. The suspension of QE in December 2014 did not mean that the policy of excess money ended. Money supply and liquidity injections still continued to flow into the US economy at above historical averages under the Yellen regime—i.e. continuing again the trend set under Bernanke. The injections simply continued using traditional central bank monetary policy tools. And as under Bernanke, the Yellen official justification for the continued excessive expansion of the money supply remains the need to attain a price level of 2%.

But the Fed’s 2% price target is a fiction. The official objective of Fed excess money and liquidity injection was, and remains, to boost financial asset markets and hope for a spillover effect; to keep the dollar low to subsidize US exports; and to hope somehow to generate a real investment spillover effect and exports surge that will raise GDP growth. But if it doesn’t, then at least investors, bankers and MNCs will have recovered nicely nonetheless.

The Fiction of Price & Other Targets

The Bernanke/ Yellen Fed has repeatedly failed to attain its 2% official price target. Secondary targets—both official and unofficial– have been suggested in recent years as an alternative, leaving it increasingly unclear what targets the Yellen Fed has been actually trying to achieve. Is it really a 2% price level? Is it to reduce the official unemployment rate to 4.5%? Is it to get wages growing again in order to boost household consumption? Is it to ensure that financial system instability does not erupt again like, or even worse than, it did in 2008-09?

Price Stability Targeting

The $3.2 trillion QE under Bernanke (plus more from traditional monetary policy tools) clearly failed to achieve the Fed’s official 2% price target. But the Yellen Fed has not done any better as it added another roughly $1.0 trillion to the Fed’s balance sheet.

2% Fed Price Target Attainment.
Bernanke v. Yellen Fed
Bernanke Fed (60 mos.) Yellen Fed (36 mos.)
1/09 12/13 Avg%chg/yr 12/13 12/16 Avg%chg/yr

PCE Price Index 1.00 108.2 1.6% 108.2 111.6 1.0%

CPI Price Index 0.98 1.07 1.8% 1.07 1.11 1.2%

GDP Deflator 99.9 107.6 1.5% 107.6 112.8 1.6%

If one compares and contrasts the Bernanke and Yellen Fed in terms of the 2% price target, it is clear that neither Fed came close to the target. This was especially true of the Fed’s preferred price indicator, the Personal Consumption Expenditures Index (PCE). But also true for the Consumer Price Index (CPI), and even the broader price indicator for all the goods and services in the real economy, the GDP Deflator index. As of April 2017, over the three and a third years of the Yellen Fed, the PCE still averaged only 1.2%.

Despite some evidence of the PCE beginning to rise faster in early 2017, the PCE index for April 2016 to April 2017 was still only 1.5%–still well below the 2% target. If the price index were really the key target for deciding on Fed rate hikes in 2017 and beyond, that target was certainly not achieved. The fact that the Fed began raising rates after December 2016 nonetheless, thus confirms price targets have little to do with Fed decisions to raise rates or not. They are a fiction to justify and obfuscate other real reasons.

Unemployment Rate Targeting

As the 2% price level slipped from view, the Bernanke Fed indicated its policies would continue unchanged until the unemployment rate had declined to what was called the Non-Accelerating Inflation Rate of Unemployment (NAIRU). NAIRU was a fictional assumed rate of unemployment at which an equally fictional price level was assumed to stabilize at 2%. NAIRU was also a constantly moving variable and target, depending on who defined it, assumed to be somewhere around 4.4% to 4.9%. Another problem with it is that the 4.4-4.9% measure was based on what was called the U-3 unemployment rate. And the U-3 ignored 50 million or more jobless—the underemployed part time and temp workers, plus what was called the ‘missing labor force’, plus the number of grossly underestimated ‘discouraged’ workers who gave up looking for a job (but were no less unemployed). It also overlooked the collapse of the labor force participation rate, which had declined by 4% of the labor force in the past decade. At 157 million, that meant 6 to 6.3 million have dropped out of the labor force altogether and, given the way the US calculates unemployment rates, were never counted as unemployed for purposes of determining the U-3. Adding in these ‘actual jobless’ categories raises the U-3 official rate to around 10%. And even that figure fails to account accurately for joblessness in the ‘underground economy’, and among urban youth, undocumented workers, workers on permanent disability, and itinerant labor. The real unemployment rate today is thus around 12-13%. The Fed’s informal shift to targeting a U-3 unemployment rate should therefore be considered as just as fictional a ‘political placeholder indicator’ as the 2% price level target. Neither could nor would be attained.

So the Yellen Fed’s performance in price targeting was no improvement over Bernanke’s. It was therefore not surprising that the Yellen Fed continued to search for some alternative indicator of ‘success’ for its policies after 2013, like the U-3 unemployment rate, or even flirted with the idea of wage growth as proof of Fed monetary policy success. It suggested perhaps wage growth was an alternative and better measurement than the unemployment rate, since it took an extended period even for the U-3 to recede to 4.5%.

Wage Growth Targeting

The Yellen Fed left the measure of wage growth vague quantitatively, however, since it was never offered as an official alternative target and the U-3 unemployment rate target of 4.7% was eventually achieved in 2016. But a look at various indicators of real wage growth reveal a general stagnation or worse, whether under Bernanke or the Yellen Fed.

Instead of acknowledging failure to achieve the 2% price level target, both Fed’s publicly diverted attention to alternative ‘targets’ to prove their QE-ZIRP, and excessive liquidity programs in general, were ‘successful’. But it wasn’t any of the targets—however defined—that were the key. It was the liquidity itself that was the objective. It was all about providing virtually free money to the banks and investors, and the boosting of the financial markets—stocks, bonds, etc.—that was the true target of Fed monetary policy and strategy. And the Yellen Fed was no different than the Bernanke in that regard. Formal targets were secondary and fictional; liquidity injections were primary and what Fed monetary policy was really all about—i.e. boosting financial markets to record levels and only secondarily, keeping the US dollar depressed in the false expectation that somehow it might stimulate real investment and growth a little even though it exacerbated capital gains income and accelerated income inequality trends.

The Money Supply Function

Comparing money supply management and liquidity between the two Feds shows that the Yellen Fed was moderately more aggressively injecting liquidity when measured by the M2 money supply, although less so when the M1 is considered. Comparing Bernanke’s full eight-year term to Yellen’s three and a third years to date, shows the following comparisons in money supply and liquidity..

M1 & M2 Money Supply
Bernanke v. Yellen Fed($ Trillions)

Bernanke Fed Yellen Fed

12/05 12/13 $chg/yr. %chg/yr. Tot%chg 2/13 04/07 $chg/yr. %chg/yr. Tot%chg
M2 $6.6 $10.6 $.5 7.6% 60% $10.6 $13.5 $.87 8.3% 27%
M1 $1.4 $2.7 $.16 11.6% 93% $2.7 $3.4 $.21 7.9% 26%

Even with the ending of QE3 under Bernanke in late 2013, the money supply and liquidity continued to grow under Yellen’s Fed. M2 has actually grown faster at an annual rate under the Yellen Fed. What that suggests is that Yellen’s central bank has perhaps made greater use of traditional Fed tools like open market operations to inject liquidity and ensure that short term rates remained near zero (ZIRP) even after QE was terminated. In this sense, the Yellen bank represents something of a partial shift in terms of monetary tools. The QEs may have been wound down as Bernanke left office, but the Bernanke policy of ZIRP was carried forward by Yellen’s bank just as aggressively by other means.

From the beginning of 2006 to the present, both the M2 and M1 money supply have more than doubled under the Bernanke/Yellen Fed! The US banking system was effectively bailed out in 2010—quite some time ago. But the QEs and ZIRP and liquidity have just kept coming. If the Fed’s liquidity policy has been as aggressive as it has in order to bail out the banks, why then did the bailout continue for the next seven years?

It is therefore incorrect to describe Fed policies as a bank bailout after 2010. It is more correct to identify Fed policy since 2010 as an unprecedented historical subsidization of the financial system by the State, implemented via the institutional vehicle of the central bank.

Financial Subsidization as New Primary Function?

Central bank financial subsidization policy raises the question as to whether the primary function of the central bank in the 21st century is more than just lender of last resort, or money supply management, or bank supervision, as has been the case in the past before 2008. Certainly those primary functions continue. But a new primary function has demonstrably been added: the subsidization of finance capital rates of return and profitability—regardless of whether the financial system itself is in need of bailout or not. Globalization has intensified inter-capitalist competition and that competition compresses prices and profits. So the State, in the form of the institution of the central bank, now plays an even more direct role in ensuring prices for financial assets are not depressed (or prevented from rising) by inter-capitalist global competition; and that global competition is more than offset by central banks becoming a primary source of demand for private sector financial assets. Excess liquidity drives demand for assets, which drives the price of assets and in turn subsidizes price-determined profitability of financial institutions in particular but also of non-financial corporations that take on the characteristics of financial institutions increasingly over time as well.

Long after banks were provided sufficient liquidity, and those in technical default (Citigroup, Bank of America, etc.) were made solvent once again, the Yellen Fed has continued the Bernanke policy of massive and steady liquidity injection. Whether the tools are QE or open market operations, modern central bank monetary policy is now about providing virtually free money (i.e. near zero and below rates). Targets are mere justifications providing an appearance of policy while the provision of money and liquidity is its essence. Tools are just means to the end. And while the ‘ends’ still include the traditional primary functions of money supply and liquidity provision, lender of last resort and banking system supervision—there may now be a new function: financial system subsidization.

The ideological justification of QE, ZIRP and free money for banks and investors has been that the financial asset markets need subsidization (they don’t use that term however) in order to escalate their values in order, in turn, to allow some of the vast increase in capital incomes to ‘trickle down’ to perhaps boost real investment and economic growth as a consequence. They suggest there may be a kind of ‘leakage’ from the financial markets that may still get into creating real things that require hiring real people, that produce real incomes for consumption and therefore real (GDP) economic growth. But this purported financial trickle down hardly qualifies as a ‘trickle’; it’s more like a ‘drip drip’. It’s not coincidental that the ‘drip’ results in slowing real investment and therefore productivity and in turn wage growth. This negative counter-effect to central bank monetary policy boosting financial investment and financial markets now more than offsets the financial trickle-drip of monetary policy. The net effect is the long term stagnation of the real economy.

The Fed’s function of money supply management may be performing well for financial markets but increasingly less so for the rest of the real economy. That was true under Bernanke, and that truth has continued under Yellen’s Fed as well. Central bank performance of the money supply function is in decline. The Fed is losing control of the money supply and credit—not just as a result of accelerating changes in global financialization, technology, or proliferation of new forms of credit creation beyond its influence. It is losing control also by choice, as it continually pumps more and more liquidity into the global system that causes that loss of control.

The Yellen Fed’s 5 Challenges

The Yellen Fed (and its successor) face five great challenges. Those are: 1) how to raise interest rates, should the economy expand in 2017-18, without provoking undue opposition by investors and corporations now addicted to low rates; 2) how to begin selling off its $4.5 trillion balance sheet without spiking rates, slowing the US economy, and sending EMEs into a tailspin; 3) how to conduct bank supervision as Congress dismantles the 2010 Dodd-Frank Banking Regulation Act; 4) how to ensure a ‘monetary policy first’ regime continues despite a re-emergence of fiscal policy in the form of infrastructure spending; and 5) how to develop new tools for lender of last resort purposes in anticipation of the next financial crisis.

1. Suspending ZIRP and Raising Rates

A major challenge confronting, and characterizing, the Yellen bank has been whether, how much, and how fast to raise US interest rates.

The Fed’s key short term interest rate, the Federal Funds Rate, was reduced from 5.25% in 2006 to virtually zero at 0.12% by June 2009. In fact, it was effectively lower since the Fed even subsidized this by paying banks 0.25% to keep their reserves (now growing to excess) with the Fed. So it was slightly negative in fact.

The Bernanke Fed kept the rate at around 0.1% until Bernanke left office in January 2014. When the taper tantrum erupted in the summer 2013 and Bernanke sharply retreated on QE tapering, he calmed the markets by promising not to raise rates until 2015 even if QE was eventually slowly reduced. And that promise Bernanke, and his successor Yellen, effectively kept. That meant the Fed ensured seven years of essentially zero rates and therefore free money to bankers and investors from early 2009 through 2015. During those seven years, while bankers got free money more than 50 million US retiree households, dependent on bank savings account interest, CDs, and other similar fixed income accounts, realized virtually nothing in interest income. Over the period more than $1 trillion was lost. In effect, it was a transfer of trillions from retiree households to bankers, and accounts for a good deal of the accelerating income inequality trend since 2009. While average income retired households lost the $trillion, bankers and investors invested and made $trillions more—so income inequality was exacerbated by two inverse conditions: lost income for retired, mostly wage and salary former workers, and escalating profits and capital incomes for bankers, shareholders, and investors.

The Fed’s Minneapolis district president, Narayana Kocherlakota, who often disagreed with Bernanke and Yellen’s policy of continuing low rates, upon leaving the Fed in December 2015 remarked that the near zero (ZIRP) Fed rate policy was planned to be that way from the beginning—i.e. to have a long period of zero rates regardless of publicly announced targets. The Fed from the beginning planned to engineer a slow recovery after November 2009. It was no accident of economic conditions. As the outgoing Fed president, Kocherlakota, put it,

“We were systematically led to make choices that were designed to keep both employment and prices needlessly low for years”…the Fed “was aiming for a slow recovery in both prices and employment”.

Kocherlakota’s comments represent a ‘smoking gun’, from a Fed insider who was in on all the major deliberations on Fed interest rate policy. Neither price nor employment targets were apparently important. Rates would be kept near zero no matter what, and for an indefinite period. But if not to achieve price and employment targets, then for what reason? The only other objective had to be to pour money into financial asset markets, equities, bonds, and other securities for an open-ended period, regardless of how slow and halting the real recovery that produced and whatever the negative economic consequences for jobs, wages, tax revenues and deficits, accelerating income inequality, and all the rest.

The first hint of possible interest rate hikes emerged in August-September 2015. But the Yellen Fed postponed action due, as it noted, to increasingly unstable global economic conditions. Global oil and commodity prices were plummeting. China’s stock markets had just imploded and the potential contagion effects globally were uncertain. Greece had just barely avoided a default with unknown effects on global bond markets. And concerns were growing that US government and corporate bond markets were facing a possible liquidity crisis. Corporate bond issues in the US had doubled since 2008 to $4.5 trillion, but banks were holding only $50 billion to handle bond transactions, down from $300 billion in 2008. The fear was if Fed rate hikes pushed up bond rates as well, investors might not be able to sell their bonds. That could lead to a bond price crash. At least that was the logic bandied about in Fed circles at the time. So the Yellen Fed put off raising rates in September 2015.

The first Fed rate hike in a decade finally came in December 2015, albeit a very timid 0.25% increase. But even that minimal hike precipitated a big drop in US stock prices. The DOW, NASDAQ and S&P500 all contracted in a matter of weeks in January-February 2016 by -7.5%, -14%, and -12%, respectively, in expectation of possible additional Fed rate hikes in 2016. The extreme sensitivity of stock price swings to even minor shifts in interest rates and liquidity injections thus further confirms the tight relationship between Fed rates and liquidity policies and financial markets. After eight years of free money, financial markets had become dependent upon—if not indeed addicted to—Fed liquidity availability in the form of QE and zero rates.

But the Yellen Fed would not follow up the December 2015 rate hikes with further increases throughout 2016, even though in December it was projected to have four more rate hikes in 2016. China once again appeared unstable in early 2016. Europe and Japan were expanding their portfolio of bonds at negative interest rates and their QE programs, putting downward pressure on interest rates everywhere. The dollar was rising. For the first time ever global trade was growing more slowly than global GDP. Global oil prices slipped below $30 a barrel in January. The US economy in the first quarter of 2016 slumped to a 0.8% low. And on the horizon loomed the unknown consequences of the UK Brexit event on global markets. Not least, by the summer of 2016 the US was in the final legs of its national election cycle. With the growing anti-Fed sentiment rising in the US at the time—both from the right and the left—the Fed did not dare to change any policy just before the US national elections—especially as the US economy, in the months immediately preceding the election, was again growing weaker. Consumption was slowing. Producer prices were declining. Business spending was again faltering. Bank loans had declined for the first time in six years. Manufacturing had begun to contract. Fed rate hikes in the first half of 2016 were no longer on the agenda.

In testimony before Congress in February 2016 Yellen indicated the Fed had instead now adopted an outlook of ‘watchful waiting’. That signaled to stock markets that near zero rates and free money would continue mostly likely for the remainder of the year. Having retreated by -7.5% to 14% in the preceding six weeks, stock markets again took off. The Dow, Nasdaq and S&P 500 surged, respectively, by 14%, 23% and 19% for the rest of 2016.

What the Yellen Fed reveals with this timing of the first rate hike, before and after, of December 2015 is that the US central bank has become the ‘central bank of central banks’ in the global economy. Today, its decisions have as much to do with global economic conditions as they do with the US economy. It takes into consideration the effects of its actions on US capitalist institutions offshore as well as on. It co-operates with the other major central banks in Europe and Asia, which becomes a key factor in its ultimate rate decisions. Its mandate may be the US economy, and Fed chairs often declare they don’t care about the consequences of their decisions on other economies, but that’s simply not true. At times the Fed is more concerned about the impact of decisions on offshore markets, US MNCs’ profits, and US political allies’ currencies than it is concerned about the needs of the US economy itself. The two considerations often also contradict.

In short, the Fed looks ‘outward’ not just ‘inward’ on the needs of the US economy and the effect of rate decisions it makes on the US economy. The hesitations and decisions of the Fed as it considered raising interest rates in the months preceding December 2015, and subsequent decision not to raise rates again for the entire next year until December 2016, is testimony to the fact the Fed considers itself the ‘central bank of central banks’ in the capitalist global economy.

Although the Yellen bank would not act to raise rates in the months immediately preceding the 2016 election, pressures continued to mount at the time in favor of a second rate hike. Regardless of who might have won the 2016 presidential contest, the Fed was therefore poised to raise rates immediately thereafter. And it quickly did. The Fed Funds Rate had already risen to 0.24% due to the first rate hike in December 2015. In a second decision in December 2016 the Fed raised it further to 0.54%. Subsequent hikes in early 2017 pushed the short term rate to 0.90% as of May 2017.

While the Fed in early 2017 had signaled the possibility of three more rate hikes in 2017, followed by still further hikes in 2018, as the US economy enters the summer of 2017 it is highly unlikely that many further increases will actually occur. That is because both the US and global economy by late spring 2017 began to appear not as robust as business and media circles had thought, or as the majority on the Fed’s FOMC had apparently assumed as well.

Much of the boost to business investment and the stock markets that occurred after the November 2016 US election was the consequence of expectations by business of major fiscal stimulus and business-investor tax cuts coming quickly from the new Trump administration—the so-called ‘Trump Trade’ (stocks and financial assets) and the related ‘Trump Bump’ (real GDP economy). But it was a post-election real bounce built upon euphoria and expectations. It was the release of business and investor ‘animal spirits’ based more on wishful thinking than real data. Moreover, significant soft spots still permeated the US economy and were once again beginning to emerge in 2017. The global business press began to note that “more investors and analysts are questioning whether an expected rise in the US interest rate is warranted in the face of subdued inflation and signs of weaker growth.”

By late spring it increasingly appeared the ‘Trump Effect’ was beginning to fade, as more political analysts predicted the fiscal stimulus would be delayed until 2018, and that whatever stimulus did occur would produce less in real net terms than assumed by business, investors, and the Trump administration. Furthermore, the contribution of China’s mini-economic resurgence in early 2017, which has provided much of the impetus behind modest growth in Japan and Europe, had by late spring 2017 also begun to show signs of weakening. Chinese manufacturing data showed contraction once again and its government’s 2017 crackdown on speculation in housing and stock markets was once again likely to produce more slowdown later in the year.

In short, a fading of the Trump effect and China growth slowing again might very well make the Fed pause before raising rates further after June 2017. The combined Trump Fade/China slowdown is further buttressed by a third force likely to constrain the Fed from following through with more rate hikes after June 2017 or in 2018: the rapidly deteriorating US trade deficit, now at -$760 billion a year and growing. It is highly unlikely, therefore, that the Fed would risk two more rate hikes in 2017, let alone three more in 2018. That would accelerate the US dollar’s rise and push the US trade deficit toward $1 trillion a year. There are further unknowns with the pending US debt ceiling extension. While the Yellen leadership is almost certainly coming to an end in February 2018, as Yellen is replaced by Trump, the Fed will likely hold on further rate hikes unless the US and global economies reverse direction and grow rapidly in late 2017.

Addendum: Revisiting Greenspan’s ‘Conundrum’

A corollary of sorts to the Fed’s short term (federal funds) rate policies is what is the effect of such policies on longer term bond yields (i.e. rates)? Neither the Fed nor any central bank for that matter are able to directly influence the direction or magnitude of long-term bond rates much, if at all. And it appears that ability, as minimal as it has ever been, is now growing even less so in the global financialized economy. That brings the discussion back to the question of the so-called ‘conundrum’ of short- vs. long- term rates raised by Greenspan. What then can be concluded about the ‘conundrum’ under the Yellen Fed?

Given that the Yellen Fed continued unchanged for three years the Bernanke Fed’s policy of keeping short term rates near zero, and only in the last six months of its term did the Yellen Fed begin to raise rates consistently, what can be said of the ‘conundrum’ under the Yellen Fed? Have longer term bond rates followed the rise in short term federal funds rate in turn. The conundrum certainly was in effect under Yellen. Bond rates rose modestly after the November 2016 elections as the Fed reduced the federal funds rate starting December 2016. But after the Fed’s March 2017 hike, long-term rates began to decline once again as short-term rates were raised. In other words, no correlation between long and short and the ‘condundrum’ returned.

Is then the conundrum a fiction of Greenspan’s imagination—i.e. a concocted excuse to justify his failure at Fed rate management? An ideological construct created to provide cover for Greenspan’s failed policies? Or does it take significant and rapid shifts in Fed generated short term rates to even begin moving longer term rates? Perhaps there is a correlation but it has grown increasingly weak as the global economy has financialized. Perhaps central banks, most notably the Fed, have nearly totally lost all ability to influence long-term rates by short-term rate changes in an increasingly globalized and financialized world economy. Whichever is the case, so much for Greenspan’s conundrum—i.e. another of the various ideological constructs created by central bankers to justify and obfuscate the real objectives of their monetary policies. ‘Condundrum’ is thus a conceptual creation belonging in the same box as central bank independence, price targeting, and ‘dual mandates’ to address unemployment.

2. Selling Off the $4.5 Trillion Balance Sheet

From 2008 through May 2017, QE and other Fed liquidity programs raised the Fed’s balance sheet from $800 or so billion to $4.5 trillion. The QE programs ended in October 2014. Since then payments on bonds to the Fed could have reduced the Fed’s balance sheet. However, the Fed simply reinvested those payments again and kept the balance sheet at the $4.5 trillion level. In other words, it kept re-injecting the liquidity back into the economy—in yet another form indicating its commitment to keep providing excess liquidity to bankers and investors.

Throughout the Yellen Fed discussions and debates have continued about whether the Fed should truly ‘sell off’ its $4.5 trillion and stop re-injecting. That would mean taking $4.5 trillion out of the economy instead of putting it in. It would sharply reduce the money supply and liquidity. It has a great potential to have a major effect raising interest rates across the board, with all the consequent repercussions—a surge in the US dollar, reducing US exports competitiveness and GDP; provoking a ‘tantrum’ in EMEs far more intense than in 2013, with EME currency collapse, capital flight, and recessions precipitated in many of their economies. It would almost certainly also cause global commodity prices to further decline, especially oil, and slow global trade even more.

Finally, no one knows for sure how sensitive the US economy may be, in the post-2008 world, to rapid or large hikes in interest rates. Over the past 8-plus years, the US economy has become addicted to low rates, dependent on having continual and greater injections. Weaning it off the addiction all at once, by a sharp rise in rates due to a sell-off of the Fed’s $4.5 trillion, may precipitate a major instability event. The US economy may, on the other hand, have become interest-rate insensitive to further continuation of zero rates, or even forays into negative rates(as in Europe and Japan) as a result of the 8 year long exposure to ZIRP.. In contrast, that same addiction may mean the economy is now also highly interest rate sensitive to hikes in interest rates. As economists like to express it, it may have become interest-rate inelastic to reductions in rates but interest-rate highly elastic to hikes in rates. But it is not likely that Fed policymakers, or mainstream economists, are thinking this way. Their ‘models’ suggest it doesn’t matter if the rates are lowered or raised, the elasticities are the same going up or going down. But little is the same in the post-2008 economy.

In an interview in late 2014 Bernanke was queried what he thought about shrinking (selling off) the Fed’s balance sheet. (A sell-off is a de facto interest rate increase). He replied he thought that interest rates should be raised by traditional means first, before considering shrinking the balance sheet. But it is quite possible that in today’s global economy, long-term US bond rates can’t be raised much above 3% before they start to cause a serious slowing in the real economy. Or short-term rates by more than 1.5%. So should rates be raised by traditional means to push Treasuries to 3% and then shrink the balance sheet, which would raise rates still further? Or should the rate increase effect from selling off be part of a combined approach to attain the 3%? It is likely the Fed can’t have it both ways: it must either raise rates by selling off its balance sheet in lieu of traditional operations, or retain its balance sheet and raise rates by traditional monetary operations. The maximum level of bond rates in today’s US economy, at around 3% to 3.5%, can’t sustain the effect of a double rate hike by traditional means followed by a balance sheet sell-off. It would result in too much instability.

However, Bernanke believes if the sell-off is ‘passive and predictable’ it would not destabilize. And he refers to normalization first of short term, federal funds rates. But any such policy will have a corresponding psychological effect on long-term bond rates as well, which can’t sustain any increase beyond 3.5% before the economy seriously contracts.

How should the balance sheet be shrunk? Here are some options. The Fed could have auctions to sell the $4.5 trillion in Treasuries and mortgage securities it holds, just as it held auctions to buy many of them back in 2009. Or it could withdraw the liquidity through the Fed’s participation in the Repo market where banks use Treasury bonds as collateral to borrow and loan money to each other short term; the Fed could administer what it calls ‘reverse repos’ and withdraw liquidity from the economy through repo market operations. As a third option, it might discontinue its practice of re-investing the bonds as they are paid off and mature and let the balance sheet naturally ‘run off’. Or, as others have suggested, the Fed should adopt a policy of maintaining the $4.5 trillion on its books. Or even add to it by buying student debt. Or corporate bonds, as in Japan and Europe.

Talk of selling off the balance sheet became more prominent in 2017, as the Fed began to raise short term rates more frequently. Think tanks, like the Brookings Institute, began to hold conferences. Fed district presidents began to call in March 2017 for a formal discussion and consideration of the subject, which Fed minutes show was raised and discussed at its May 2017 FOMC meeting. Concern was increasingly expressed that sell-off would not only raise rates but raise the dollar’s value as well, with negative effects on exports and on manufacturing production, given both were already showing signs of slowing. Advocates for sell-off respond that keeping the balance sheet at current $4.5 trillion levels by re-investing would mean rising interest payments by the Fed to banks and investors as interest rates rose.

But with Yellen more likely than not to be replaced in February 2018 by Trump, the Fed will focus predominantly on traditional approaches and tools to try to raise rates. However, if the US economy falters, as the euphoria over the yet to be realized Trump fiscal stimulus fades, or is inordinately delayed, then even Fed short-term rates may not increase much after June 2017. Yet another unknown factor is the outcome of the US budget and need to raise the US government debt ceiling. All these events and developments make it highly unlikely the Fed will commence with any sell-off until well into 2018.

Notwithstanding all the possible negative economic consequences of disposing of the $4.5 trillion, this past spring 2017 the Fed reached an internal consensus of to begin doing so. That consensus maintained that an extremely slow and pre-announced reduction of the balance sheet would not disrupt rates significantly. But as others have noted, “such an assessment is complacent and dangerously incomplete”. Selling off the $4.5 trillion would mean lost interest payments to the US Treasury amounting to more than $1 trillion, according to Treasury estimates. That’s $1 trillion less for US spending, with all it implies for US fiscal policy in general as the Trump administration cuts taxes by $trillions more and raises defense spending. In other words, sell-off may result in a further long-term slowing of US GDP and the real economy.

At its mid-June 2017 meeting the Fed announced a blueprint outline of that consensus and the Fed’s long-term plan for selling off $4.5 trillion. In her press conference of June 14, 2017 Yellen announced the Fed would stop reinvesting the bonds as they matured at a rate of $6 billion a month for US Treasuries and $4 billion a month for mortgage bonds. That’s $10 billion a month. However, no set date to start the sell-off was announced. Just sometime in the future. At that rate of sell-off, it would take the Fed 37.5 years to dispose of its balance sheet. This token reduction of Fed debt from the last crisis means it is largely for public consumption and to head off critics who now argue the Fed is a profit-making institution (again), making interest off of securities that otherwise private banks might be earning. Another explanation for the token debt reduction, however, is that the Fed doesn’t intend to reduce its balance sheet all that much. In reality, in the end it will retain most of it.

3. Bank Supervision amid Financial Deregulation

Banking supervision in the US has always been fragmented, with the central bank assuming just part of that general responsibility. It is likely this fragmentation has been purposely created. Sharing the responsibility of bank supervision with the Fed have been the Office of the Comptroller of the Currency, OCC, with origins back to mid-19th century. The OCC was the original agency tasked with bank supervision for at least a half century before the Fed was created. Its record of effectiveness includes allowing four major financial crashes after the Civil War (and consequent depressions) up to the creation of the Fed. Another important bank regulatory agency is the Federal Deposit Insurance Corporation, FDIC, created in the 1930s in the depths of the Great Depression, which is responsible for smaller regional and community banks. The Office of Thrift Supervision (OTS) is another; it failed miserably to prevent the Savings & Loan crash in the 1980s and was the official regulator of AIG, the big insurance company and derivatives speculator at the heart of the 2008 banking crash. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) are also part of the bank supervision structure, responsible for brokerages and stock and commodity markets. There’s a parallel credit union regulatory agency. Fifty States also have their own regulatory agencies for state-chartered banks, creating a yet further byzantine regulatory structure.

The overlapping and conflicting bank regulatory centers makes it difficult to coordinate regulation and simultaneously easy for banks to whipsaw and play agencies against each other. In other words, the fragmentation is purposeful and has been intentionally created. The complexity and overlap favors the banks and not the public, allowing private financial institutions to deflect, minimize, and delay regulatory efforts to check and reform risky bank practices after periodic financial crises erupt. The delays provide time to allow public demands and legislative action for stronger bank supervision to dissipate.

The US Dodd-Frank Act is a good example of the ‘delay and dissipate’ history of US bank supervision and regulatory reform. Passed in 2010 with great fanfare by the Obama administration it had built into its legislation a four-year delay period for developing specific details. During that four years Bank lobbyists had numerous opportunities to defang the Act, which they cleverly did, after four years leaving the initially weak Act a shell of what was intended. “Year in and year out, the financial sector spends more on lobbying than any other industry. During 2009-10, the interests most concerned about financial regulatory reform—banks, insurance companies, mortgage banks and brokers, securities and investment firms, credit and finance companies, and credit unions—spent considerably more than $750 million on lobbying the government. Together those industries retained more than 2,700 individual lobbyists”.

To provide a complete assessment of bank supervision in the US in the post-1945 period is beyond the scope of this book. The intent is to assess the Fed’s role in bank supervision under the Yellen Fed since the 2010 Dodd-Frank Banking Supervision Act finally took effect in 2014.

The Dodd-Frank Act attempted to expand bank supervision in five specific ways by establishing: a systemic risk assessment process and regulation of the biggest (8 too big to fail banks and 3 insurance companies) overseen by a new 9-member council of regulators chaired by the Treasury; an authority to wind down banks that fail; a consolidation of existing bank regulators; new regulations for some shadow banks previously outside the regulatory framework (i.e. hedge funds, mortgage companies, etc.); and a new Consumer Financial Protection Bureau (CFPB) to protect households from financial institutions’ predatory practices.

As of late 2016, a full two years into the Yellen Fed term, the issue of how much capital the too big to fail banks needed to keep in the event of another crisis had still not been resolved. The big 8 banks’ equity to total assets (i.e. liquid funds to use to offset losses to prevent bankruptcy in another crisis) was still only 6.6%. Incoming president of the Minneapolis Fed district, Neel Kashkari, declared the banks would need 23.5% of equity to assets to be safe. Banks that failed that requirement and were considered a risk to the financial system would thereafter need to maintain a 38% level. If they couldn’t, they should then be broken up. Kashkari subsequently further proposed that excess debt (leverage) held by financial institutions should be taxed. Like his previous suggestion, that too fell on deaf ears within the Fed. The point is that, after three years of the Yellen term, the question of ‘too big to fail’ was still fundamentally unresolved.

In its initial drafts the Act did not envision expanding the bank supervision authority of the Fed. In fact, full supervision of banks and other financial institutions with less than $50 billion in assets was transferred to the FDIC. The Fed was thus stripped of authority to supervise the roughly 8000 or so remaining state-chartered banks. However, it retained authority over the largest 44 banks and bank holding companies.

Nor was a consolidation of the various US regulatory agencies accomplished by the Act. Only the OTS was consolidated, within the OCC. A new Federal Insurance Office (FIO) was created under the supervision of the Treasury. And the SEC was given authority to regulate over the counter derivatives and credit rating agencies like Moody’s, Inc. and hedge funds were required to register with the SEC. Thus the problem of fragmented institutional bank supervision across multiple overlapping agencies continued and in ways actually expanded, with 225 new rules across 11 different regulatory and banking supervisory institutions.

The 9-member regulatory committee, the Financial Stability Oversight Council (FSOC) also gave the Fed authority, upon a 2/3 FSOC vote, to oversee non-bank financial institutions that were deemed potentially risky to system stability. This brought a small part of the shadow bank sector under its supervisory authority as well, in particular hedge funds and private equity firms.

While the Fed gave up bank supervisory authority in some areas, it assumed new authority in others. It now supervised national thrift savings institutions, assuming some of the authority of the former OTS and was given rule-making authority related to proprietary (derivatives) trading by banks (Volcker rule). The 2010 Act created a consumer protection agency, the Consumer Finances Protection Bureau (CFPB), which was put under the Federal Reserve. Initially the CFPB was to be an entirely independent agency, with its own financing. Its director would act independent of the Fed’s Board of Governors. Its single director could be removed by the President not at will, but only if proven negligent. Consumer matters related to credit cards, mortgage and auto loans, payday and other loans were subject to CFPB rules and actions. The CFPB was funded by the Fed, not Congress. Decisions by the CFPB that were initially intended to be independent of the Fed were eventually, however, made subject to veto by a special committee of the other traditional bank regulators, which included the Fed. On paper it appeared as if the CFPB’s regulatory successes since its implementation in 2011 were the product of the Fed. But its aggressive retrieval of funds on behalf of consumers—$12 billion for 29 million—was in spite of the Fed, which kept itself at arm’s length from the operations of the CFPB.

A contrast between the Fed and the CFPB as supervisors was revealed in the event involving Wells Fargo Bank in September 2016. CFPB investigations reported the bank was charging 2 million customers fees for fake credit card and other accounts, and it issued them without customers’ knowledge or permission. It appeared as if it were déjà vu of big bank misbehavior during the 2008 subprime mortgage fiasco. Wells Fargo is one of the 8 too big to fail banks supervised by the Fed, which meets with the bank’s CEO at least four times a year. Where was the Fed, many asked? “The core of the case against Wells Fargo has been well-known since a remarkable investigative report by the Los Angeles Times in 2013, and hints of the troubles were already apparent in a Wall Street Journal article in 2011.” When asked why the Fed did not know of such practices, Yellen replied the Fed was not responsible for regulating this side of Wells’ operations. If it failed to identify subprime-like practices at one of its largest 8 banks it supervised, what else might the Fed be overlooking?

Another development suggesting the Fed was dragging its feet on bank supervision involved what was called ‘merchant banking’. This is where financial institutions in effect act like private equity shadow banks by buying up non-bank operating companies. If non-bank companies owned by commercial banks with household deposits went bankrupt, the potential was greater for crashing the banking side as well. The Fed was tasked with establishing rules to prevent this back in 2012. But it only issued a study of the potential problem four and a half years later.

But perhaps the most visible indicator of actual Fed bank supervision is the periodic ‘stress tests’ of the big banks that the Fed has conducted since early 2009. The test itself is somewhat a misnomer. What the Fed does is release scenarios, hypothetical situations, of recession or extreme unemployment or collapse of housing prices which it gives to the banks. They then predict to the Fed how they would perform under such conditions, indicating if they believe they have enough capital to weather the crisis. Not surprising, they report they can survive. The Fed then decides whether it believes them or not. If it does, it allows the banks to pay dividends and give themselves bonuses. Only on rare occasions has the Fed decided it didn’t agree with the bank, as it did with Citigroup. In other words, the scenarios are typically set up to enable nearly all the banks to pass the test. Until 2016 the banks subject to the stress test included those with assets above $50 billion and should have no more than $10 billion foreign exposure. Under Yellen’s Fed these rules have been significantly liberalized, however. The cutoff now is $250 billion in assets and the foreign exposure rule has been discontinued. As a result, 21 big banks, like Deutschebank and others foreign banks (who do business in the US and are therefore subject to the tests if they qualify by size) are now exempt from the stress testing.

Apparently new district Minneapolis Fed president, Neel Kashkari’s, warning noted above that banks need to increase their capital buffer to survive the next crisis from current 6.6% to 23.5% has not been adopted as part of the stress testing.

Instead of increasing Fed and other regulatory institutions’ bank supervision authority, what remains of the Dodd-Frank Act of 2010 and regulation is about to be reduced even further. In 2017 the US House of Representatives introduced The Financial Choice Act of 2017, which virtually dismantles the CFPB, puts FSOC activity on hold, reduces regulation of big insurance companies like AIG, exempts many financial institutions from vestiges of bank supervision by the Fed and other agencies, and eliminates many penalties for high risk behavior.

If the Fed’s bank supervisory track record since 2010 has been dismal, what might it be under a Trump regime pushing for yet more banking deregulation? The 2017 scenario seems and feels very much like the Bush-Paulson initiatives of 2006-07: deregulate everywhere.

4. Monetary Policy First vs. Infrastructure Spending

Yet another major challenge on the horizon for the Yellen Fed is how the Fed will respond to a new fiscal spending stimulus, should it occur. The Trump administration continually declares it plans a $1 trillion infrastructure spending program. The form that spending takes is yet to be determined. It most likely will not look like direct government spending on roads, bridges, ports, power grid, and other similar infrastructure projects. It will more likely appear as some kind of Private-Public investment program, where commercial property speculators and builders will strike deals with local governments. The speculators-builders will get government real estate in the urban areas at fire sale prices, and will build new structures that local governments will lease back. The Private partner gets a leasing income stream and tax concessions, plus high value land and property that appreciates rapidly. The beneficiary big time is the real estate developer. This model is already being piloted.

The key question is whether the Fed will support and en