Don’t Take Away That Punch Bowl!

Bernanke's PunchbowlFormer Federal Reserve Chairman William McChesney Martin aptly described his job when he famously said, “I’m the fellow who takes away the punch bowl just when the party is getting good.” But there’s no taking away the punch bowl these days…

From the WSJ:

The Yellen Bulls

The Fed nominee signals no early end to our monetary adventures.

The world’s stock investors are kicking off the Janet Yellen era with a party, responding to her Federal Reserve confirmation testimony on Thursday by running up equities from Tokyo to lower Manhattan. Gold is up and bond yields are down as the next Fed Chairman signaled that the era of extraordinary monetary intervention has a long time to run.

President Obama’s nominee to succeed Ben Bernanke tried to stress continuity with the current Chairman’s post-crisis policy. She also showed off her monetary chops and economic knowledge. The Fed is not getting an amateur at the helm. Yet the markets were also taking Ms. Yellen at her word when she said that the Fed still has more work to do in midwifing a better economic recovery.

Ms. Yellen dismissed fears of asset bubbles from the Fed’s actions, especially in stocks. [Note: The same mistake as Alan Greenspan that led to the dotcom boom and bust and then the housing boom and bust?] This suggests the Fed isn’t likely to taper its $85 billion in monthly bond purchases any time soon, and that even when it does it will keep short-term interest rates at near-zero for a long time after that. This is also our reading of the 67-year-old economist and student of the late Yale economist James Tobin.

Like her Keynesian mentor, Ms. Yellen believes in the ability of monetary policy to manipulate the business cycle and generate low employment. [This ability has been proven to be severely limited and not without costs.] We think history shows this is risky business and can end badly, and avoiding such an ending will be the new Chairman’s greatest challenge. But at least for now, it’s party on.punch-bowl