Yellen triggers plan to cut stimulus and avoid disaster: Don Pittis – Business

With deadly earthquakes, hurricanes, floods and fires, this seems like a season of disasters.

Yesterday the world’s most powerful central banker, Janet Yellen, demonstrated that she is determined not to create another disaster in financial markets in spite of a dramatic change in course.

Yellen threw the switch on a plan to reverse one of the two methods central banks have used to recharge an economy battered by the 2008 financial storm.

Yellen, the U.S. Federal Reserve chair, has now formally asserted that she will withdraw both those kinds of monetary boosts to the economy, the stimulus of low rates and the slightly more complex stimulus of buying up bonds.

Nerve-racking peak

And rather than creating a shock wave likely to tumble stock markets, now trembling near a nerve-racking peak, it appears  the cautious Yellen has once again proved her worth as a safe pair of hands.

“The decisions that we’ve made this year about rates and today about our balance sheet are ones we’ve taken because we feel the U.S. economy is performing well,” Yellen told reporters at yesterday’s news conference.

Canadian borrowers may not be pleased that Yellen said that she expects the U.S. Fed rate to rise from 1.25 per cent now to 2.9 per cent in 2020, but a gradual increase is better than the market chaos some have feared. (Chris Wattie/Reuters)

Many Canadians have learned from painful experience about the impact of interest rates following the Bank of Canada’s recent increase. Higher rates make money more expensive and, other things being equal, they discourage people and companies from taking on more debt.

Yellen said yesterday that despite low inflation, the U.S. expects to continue raising rates with the intention of cooling the economy. While Yellen left rates unchanged this time, she confirmed expectations of another increase this year and more to come.

But the thing she did announce yesterday, which she seems, so far at least, to have handled deftly, is the “balance sheet” part. Its effects are more nuanced.

Perhaps in a time of disasters, a flood analogy would help to explain the Fed’s plan.

In the wake of the 2008 market shock the U.S. central bank and others around the world did not just cut interest rates.

The Fed under Yellen’s predecessor Ben Bernanke began buying up mortgages and long-term bonds, using money imagined into existence by the central bank, eventually accumulating a huge reservoir of these…

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