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Janet Yellen: Economy’s strong run could last through 2019

Former Fed chair tells MBA crowd she's cautiously confident in economic stability

Former Federal Reserve Chair Janet Yellen said the economy’s stellar run can make it through at least 2019, and that despite fears about the inverted yield curve, she doesn't think it will spell disaster this time around.

Before a packed house at the Mortgage Bankers Association's Annual Conference & Expo, Yellen said there are two things she watches for signs of a recession: financial imbalances and the Fed's tightening of monetary policy.

Yellen said she doesn't see any outstanding financial imbalances right now. The only thing she said worries her is that the economy could overheat due to strong employment growth. According to Yellen, the Fed needs to move into a neutral policy position where the labor market can stabilize.

Many firms are feeling the need for equilibrium in the labor market first hand. Yellen said she has been hearing of many cases where firms are struggling to hire and hold employees these days. It is an exceptionally tight labor market, and if it continues to drive down unemployment and accelerates wages, it could result in an unhealthy acceleration in inflation.

In terms of Fed tightening, Yellen said engineering a soft landing for the economy will require both skill and luck, but that it has a lot of room to craft the landing pad.

Yellen said she is not too worried about the yield curve inverting, because the circumstances surrounding the potential inversion are different this time around.

“I do think there is a reasonable chance that the yield curve may invert as the Fed raises rates,” she said. “Should the Fed absolutely stop before the curve inverts? I might say this time is different.”

The reason she doesn’t fear this inverted yield curve as much as many others in the financial industry is because the premium term – the amount by which the yield-to-maturity of a long-term bond exceeds that of a short-term bond – is estimated at zero or even negative, as of right now. In previous recessions, the term premium was positive and usually pretty large, Yellen said.

When the yield curve inverts with a positive term premium, it means Fed policy is tight and typically signals a recession. But, because the term premium is zero or negative, an inverted yield curve – caused by the Fed’s need to address an overheating economy – may not signal a recession.

The Fed’s monetary policy has been under heavy fire from President Donald Trump this year. He has been taking Chairman Jerome Powell to task for putting the brakes on the economic expansion.

Yellen said she disapproves of Trump’s vocal criticism and is sure that his comments won’t stop the Fed from doing its job free of political influence.

“I have confidence in my successor, Chairman Powell,” she said. “I really think it is not a desirable thing for a president to comment so explicitly on Fed policy…Obviously, presidents can speak out if they choose to and give their opinions about policy…but I don’t think it’s wise, and I do think the Fed has a strong reputation for acting in an independent and non-political way, and I would not like to see that reputation damaged.” 

In moderation, where it makes sense, Yellen said she supports the push toward deregulation in vogue of late, but she warns that it could go too far. As core businesses have come under greater regulation, she has seen more activity shift to the “shadow banking” world, and this concerns her. Though she is mildly bullish on the economy and its stability, she said, “I wouldn’t want to be overconfident.”

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