Fed rate hikes: Janet Yellen is aware of secular stagnation

Although the US labour market has already been very tight for a long time, the Fed has been hesitating to raise interest rates.

The Fed insists that its policy depends on the labour market, supposing that the strong job data leads to high inflation, but despite almost full employment in the US economy, there has been no rate hike since the first rate hike in December 2015. The reason is obvious: the Fed is not seeing the job data but seeing something else.

The slowdown of the US economy

The US economy has been slowing down. This is what we predicted in 2015 and has been proven in the recent GDP data.

Yet the Fed was slow to recognize this. In October, 10 months after our prediction, vice chairman Stanley Fischer finally mentioned Larry Summers’s secular stagnation hypothesis in his  speech in New York, as one of the possibilities.

Still, the situation is better as the Fed has been noticing there is something wrong in the GDP data. That is the very reason why rate hikes have been delayed, and Fed chairman Janet Yellen is finally researching the cause of the recent economic slowdown.

Her speech in Boston

Yellen recently gave a speech in a conference sponsored by the Federal Reserve Bank of Boston, titled “Macroeconomic Research after the Crisis”. In this very academic speech, she is contemplating earnestly on why the economic growth is weakened after the financial crisis in 2008, clearly implying what she is in fact pondering on despite the economic outlook the Fed claims is good enough for rate hikes.

“Several recent studies present cross-country evidence indicating that severe and persistent recessions have historically had these sorts of long-term effects,” she claims in her speech. “With regard to the U.S. experience, one study estimates that the level of potential output is now 7 percent below what would have been expected based on its pre-crisis trajectory.”

This seems very different from the Fed’s hawkish statements that assume rate hikes are necessary. She even insisted a “high-pressure economy” with robust demand and a tight labour market could be necessary to reverse the adverse effects after the crisis. This is almost a declaration to keep interest rates low for a long time.

The Fed was still too late

To be very frank, this is merely what several fund managers have been pointing out since a long ago. Many, including us, have been insisting rate hikes will definitely fail.

Perhaps Jim Rogers was the most brutally honest among them. “If the Fed raises rates three or four times, then it is usually all over for the stock market,” he said in an interview. “If the third interest rate hike comes from the central bank, I will certainly be selling shares worldwide.”

The reason is not only secular stagnation, but it is also about speculative money flow. Considering what QE has done for the economy, we must also consider what happens when tightening finally starts in long-term interest rates.


However, Yellen recognizes the danger. She is perhaps recalling of her mistake in 2008, when the Fed was wondering whether rates should be high or low. The central bank kept rates to be 2%, and she called it “accommodative”. Yet obviously, it was not accommodative for 2008 at all, and just some months later, the Fed had to cut rates to zero, as the bubble collapsed. We described the situation in the following article.

It was perhaps like a nightmare for her; she callied it accommodative, and everything collapsed right after it. Now she is definitely recalling 2008, as the current situations of the inflation and the GDP growth are very similar to then.