In discussing the neutral level of the Federal Funds Rate after today’s Federal Open Market Committee meeting, Janet Yellen returned to her oft stated idea that there is research indicating that the neutral level of Fed Funds is 0% in real terms. So if the Fed’s preferred level of inflation, PCE is at, lets say, roughly 1.75% right now, that means the neutral Fed Funds rate should also be 1.75% right now for the Fed to be at a neutral Fed Funds rate. Of course if the neutral rate is not quite that low, then the Fed Funds rate should be even HIGHER.
The Fed just got around at their leisurely dovish pace today to getting the range for Fed Funds all the way up to 75-100 basis points. So by her logic, the Fed is at least 100 basis points BELOW the NEUTRAL rate. Accommodative indeed. When asked whether they weren’t concerned about the insanely elevated valuation in the third and latest stock market bubble the Fed has blown in the last 20 years, she showed no angst. Indeed she stated the new Fed policy stance that elevated stock prices lead to elevated consumer spending. This is true for the richest 10% of Americans only and is a primary reason for the growing disparity between the rich and the poor. Amazing lunacy by the most powerful person on earth. Expect stocks to fly even further moonward in the coming months as the Fed is dead set to stay at less than half of what the neutral policy rate would be. Then when she has left office and things are getting out of control, expect the stock market to lose half its value sometime in 2019 or 2020, just in time to kill Donald Trump’s chances at reelection.