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Obama Set to Pick Yellen for Fed?

12:00 AM, Sep 28, 2013 • By IRWIN M. STELZER
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·     Continued easy money will almost certainly keep the housing sector moving along at a pace unattainable in a higher interest rate environment.

·     Many potential car buyers will find finance charges too steep for comfort if interest rates rise, especially since they also will be facing major increases in health insurance costs when Obamacare comes into play in a few days.

·     Continued fiscal tightening will create new headwinds, and the replay of the Presidential/Congressional budget follies is unnerving investors, making it unwise to tighten monetary policy just yet.  Yellen firmly believes that fiscal tightening creates unemployment, and that easy monetary policy is a necessary offset.

·     The labor market, although improving, remains in terrible shape. The unemployment rate is too high, the labor force participation is too low, too many of the recently created jobs are low-paying and/or part-time, with the consequences she cited in her speech to the trade unions.

Yellen might add that when it comes to monetary policy no Fed chairman can hope to get it precisely right. So he, or more likely she, must weigh the cost of too much loosening for too long against the social and economic cost of too much tightening too soon. My guess is that, like Bernanke, who believes the Fed tightened too soon during the Great Depression, Yellen would prefer to err on the side of keeping rates too low too long. Doubt that history matters and compare that view with those of German central bankers, reared to fear inflation far more even than recession.

That said, even Yellen knows this addiction to debt and mounting piles of fiat money must stop some day. Artificially low interest rates will eventually distort asset values, interfere with incentives to save, redistribute an intolerable amount of wealth from savers to spenders on cars and houses, and trigger inflation, among other evils.

Yellen knows that, and says, “When the time has come, am I going to support raising interest rates? You bet.” My guess is that the time will come for Yellen well after it would have arrived for Summers, and even after arrives for most of her current rivals, and even for Bernanke.  

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