In testimony before Congress this week, Yellen aggressively talked the Fed’s book, asserting that the U.S. economy looks so hunky-dory these days that the rate hikes she keeps promising are absolutely, definitely, positively coming. Let’s see if she changes her tune when the housing and auto sectors turn down sharply, as appears all but certain. Substantially higher mortgage rates, coupled with rising home prices caused by tight supply, have already killed off first-time buyers and the re-fi market. More recently, some of the biggest players in commercial real estate have begun to pull back from the massive bubble they created in the residential rental market. We should not allow Yellen’s self-aggrandizing narrative to delude us into thinking a strong stock market somehow reflects real strength in the U.S. economy. What it reflects, in fact, is a shift of capital from productive assets into paper assets that seem riskless only because tree-grown money from the Fed makes no demands on savers. Meanwhile, for tens of millions of Americans, most particularly those who have left the work force, the Great Recession never ended.
Yellen’s Idea of a Heated Economy
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