The Honorable Dr. Janet Yellen, Chair of the Federal Reserve, testified before the Senate Banking Committee yesterday in a ceremony that her predecessor, Dr. Bernanke, must have come to dread towards the end of his tenure.
Of course, towards the end, Dr. Bernanke’s tenure had been marked by the largest economic downturn in memory for most and he found himself shouldering much of the blame. Bodies such as the Senate Banking Committee often took the opportunity to grill Bernanke on the latest financial headlines or the direct complaints from their constituents stemming from various financial debacles that had unfolded during his tenure. Be it Lehman Brothers, MF Global, or the troubled housing market, Bernanke could count on questions ranging from the dangerous to the ridiculous from committee members who were, in many cases, further removed from reality than Dr. Bernanke himself.
So it was that Yellen took the hot seat that her predecessor had dreaded yesterday before a new set of faces in order to explain what she sees in her economic crystal ball.
From what could be gathered from the mostly scripted exchange between the parties, there seems to be a range of lingering worries in the minds of policy holders as to the health of the US economy, which recently clocked in at an underwhelming 0.1% annual growth rate in Q1 of 2014. The worries, which are no doubt rooted in recent history, range from the continued drop in labor force participation rates and what many see as a stalled out recovery in the housing market.
The US Q1 GDP number can be summed up in a phrase that Red Green was fond of, “It is winter.” Housing markets invariably slow down over the winter months, which are generally a drag on GDP as households recover from the Q4 holiday spending binge.
Labor market participation, which surfaced as a primary concern during yesterday’s hearing, is a much more complex problem, for deep down it validates the fears of nearly every thinking economist, that the US is following in the footsteps of Japan’s demographic and economic precedent.
The real problem with the US economy was not addressed directly at this hearing, nor is it likely to ever be addressed in such a forum: The extraordinary measures employed by the Fed back in 2008 in an effort to prop up the international banking system have forever altered the mode of transmitting credit into the economy. This has caused a broad based reset of the banking food chain at a time when the US economy could least afford for such a change to occur.
These extraordinary measures will be with us until the US Dollar hits its breaking point, and the inevitable currency reset begins to pick up steam. When this occurs, Dr. Yellen and the Senate Banking Committee are likely to be the last to know.