May the Force Be with Her
Published in Les Échos
(France) on 16 December 2015
by Guillaume Maujean (link to original)
We’ve been waiting for years. The suspense hasn’t stopped rising, thanks to skillfully broadcast trailers and teasers. We know the basic plot and the main protagonists, but this Wednesday is the big day. The release of the new “Star Wars” movie? No. The meeting of the American Federal Reserve Board's Federal Open Market Committee, a historic meeting which should implement the first interest rate increase since … 2006!
This is a major event for America, the sign that the world’s largest economy has gotten back on track, seven years after the trauma of the bankruptcy of Lehman Brothers. For the last seven years, its chairs Ben Bernanke and Janet Yellen have used all the weapons imaginable to repel the ghost of the Great Recession and the forces of deflation: a zero-rate policy that no one imagined would last for so long; exceptional measures to support Wall Street banks; and three huge incidences of quantitative easing — the "money machine," in financiers’ jargon. The results are clear to see. American growth has resumed at a rate of 2 to 3 percent, and the country is almost at full employment. The time has come for the central bank to lay down its weapons, come back "normal” and initiate a cycle of monetary tightening. For months, its members have been weighing the pros and cons and trying to get investors used to this change of course. A decision has never been so meticulously prepared.
And yet when the time comes to act, Janet Yellen will no doubt be thinking about the risks incurred by making such a decision. The risks of halting a recovery that some believe is still too fragile, at a time when China and the emerging nations are showing signs of weakness. The risks of provoking new tremors in the markets, especially debt markets boosted by massive liquidity. The risks of starting a new currency war. Because when the Fed wakes up, the whole financial galaxy will be in turmoil.
Yellen, however, must not waver. If she doesn’t act now she will have no room to maneuver in the future if the American economy takes another tumble. She will run the risk of chasing after inflation if wage pressures increase in the next few months. She will end up muddying the waters for investors, slightly inflating financial bubbles that are seeking only to burst. Janet Yellen can no longer back away from the decision. She must raise her rates and prudently prepare the ground for new gestures next year. May the force be with her!
This is a major event for America, the sign that the world’s largest economy has gotten back on track, seven years after the trauma of the bankruptcy of Lehman Brothers. For the last seven years, its chairs Ben Bernanke and Janet Yellen have used all the weapons imaginable to repel the ghost of the Great Recession and the forces of deflation: a zero-rate policy that no one imagined would last for so long; exceptional measures to support Wall Street banks; and three huge incidences of quantitative easing — the "money machine," in financiers’ jargon. The results are clear to see. American growth has resumed at a rate of 2 to 3 percent, and the country is almost at full employment. The time has come for the central bank to lay down its weapons, come back "normal” and initiate a cycle of monetary tightening. For months, its members have been weighing the pros and cons and trying to get investors used to this change of course. A decision has never been so meticulously prepared.
And yet when the time comes to act, Janet Yellen will no doubt be thinking about the risks incurred by making such a decision. The risks of halting a recovery that some believe is still too fragile, at a time when China and the emerging nations are showing signs of weakness. The risks of provoking new tremors in the markets, especially debt markets boosted by massive liquidity. The risks of starting a new currency war. Because when the Fed wakes up, the whole financial galaxy will be in turmoil.
Yellen, however, must not waver. If she doesn’t act now she will have no room to maneuver in the future if the American economy takes another tumble. She will run the risk of chasing after inflation if wage pressures increase in the next few months. She will end up muddying the waters for investors, slightly inflating financial bubbles that are seeking only to burst. Janet Yellen can no longer back away from the decision. She must raise her rates and prudently prepare the ground for new gestures next year. May the force be with her!
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