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Ahead of the curve: The return of Janet Yellen

December 4, 2020

A comment from Jürgen Lukasser, Chief Investment Officer of LGT Bank Österreich, on the presentation of the economic affairs team of the future 46th President of the United States and the possible return of an old acquaintance.

Ahead of the curve: The return of Janet Yellen

From today's perspective, the United States will most likely get the first female Secretary of the Treasury in history. At the moment, the appointment of the candidates by the Senate is still pending. Joe Biden's choice fell on the economist Janet Yellen and thus from the point of view of Wall Street on no unknown. Yellen is well-known to the general public primarily from the period between 2014 and 2018 as the former chairman of the US Federal Reserve. In retrospect, she did a good job back then, as she had to prepare the US economy for rising interest rates without causing much chaos. And she succeeded in doing so.

Janet Yellen has often been referred to as "dove" in the past. What is meant by this is that, within the framework of the Federal Reserve's dual mandate, its main focus is on the labor market and less on combating inflationary tendencies. Since she sees herself as a Keyensian, this also fits in well. John Maynard Keynes is one of the most renowned economists of the 20th century. His major scientific contribution was written in the economic environment of the 1930s and against the background of mass unemployment. He argued that the state has an important role to play in steering the economy. In this context, Keynes proposes an anti-cyclical approach with "deficit spending". According to this approach, the state should take an active role and increase government spending as part of fiscal policy when the economy is weak and then reduce it again when the economy is doing well.

And it is precisely this aspect that is the point of intersection with the current situation in the United States. The pandemic continues to have the country firmly in its grip. The real economy continues to suffer from this situation. The stock markets are pinning high hopes on the vaccines that were announced at the beginning of November. However, broad vaccination campaigns will take time. Without them, a return to normality is an illusion. Today, December 4, important labor market data were published. The focus was on the number of new jobs created outside the agricultural sector. It was expected that 460,000 jobs were created in November. In fact, 245,000 new jobs were reported, significantly less than expected. The job engine in the USA seems to stutter. A further fiscal package is obviously needed to bridge the time until the new vaccines are widely used. For the coming quarters, Janet Yellens' know-how as a "dove" will therefore certainly be very helpful.

Incidentally, the current US Secretary of the Treasury, Steven Mnuchin, has made it difficult to access USD 455 bn of previously unused aid from the existing fiscal package. Janet Yellen will therefore have to call Congress for approval. Steven Mnuchin has also recently caused a stir with his decision not to extend the Federal Reserve's loan programs beyond the end of 2020. This circumstance caused lines of worry among investors, since beyond 2020 the loose monetary policy together with the government's fiscal policy will continue to be decisive framework conditions for the capital markets. Abrupt changes in this area would very likely lead to chaos and distortions on the markets. Since Janet Yellen is also familiar with the Federal Reserve's perspective through her many years of service with the Fed, her election also appears to be helpful for the coordination between the Treasury Department and the Federal Reserve.

Incidentally, the stock market has not reacted negatively at all to the negative labor market data and apparently anticipates that Janet will fix it. In this sense, the only thing that can be said about this personnel decision is: Well done, Joe Biden!

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