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Janet Yellen, U.S. Interest Rates and Market Psychology at Major Market Turns

Interest-Rates / US Bonds Dec 01, 2013 - 04:47 PM GMT



Janet Yellen just moved closer to her place in history when the Senate Banking Committee approved her nomination to lead the Federal Reserve. The full Senate is expected to confirm. If so, she will be the first chairwoman in the central bank's 100 year history.

But when her term concludes, gender may be secondary to the narrative about her time at the helm. The larger focus could be that Yellen was at the helm of economic disaster.

Here's what Robert Prechter said in the October Elliott Wave Theorist:

Economists and journalists are taking Janet Yellen's approaching stint as Chairman of the Fed at face value and opining what she will bring about for the economy. Our socionomic point of view prompts a different tack and makes us ask what social mood will bring about for her.

...Social mood is a powerful regulator of public perception. Consider this contrast: Nixon lied to protect his buddies, and his career and reputation were ruined. Clinton lied to a grand jury and the nation to protect his own hide, but he makes six figures a speech. What made the difference? The answer is that social mood was deeply into a negative trend in August 1974, when Nixon finally resigned and entered retirement in disgrace; whereas it was soaring in a positive trend in 1999, when Clinton survived impeachment and went on to become perceived as an elder statesman. The stock market had been falling for over eight years in Nixon's case, and it had been rising for over eleven years in Clinton's case. This is why society condemned Nixon but forgave Clinton.

The coming negative trend in social mood will cause Yellen to fail at her job. When bond investors become more cautious -- as they will in a negative-mood trend -- the image of central-bank potency will begin to dissolve. That will neuter the Fed's presumed jawboning power. As for its ability to force inflation, the bond market, not the Fed, is ultimately in charge of interest rates. Investors' demands for higher rates will negate the Fed's inflationary activity. As rates on Treasury bonds move up, the values of existing bonds will fall, lowering the total value of money+credit, thus neutering the Fed's inflationary policy. Finally, when bond buyers begin demanding 4%, then 6%, then 10%, then 20% interest for assuming the risk of owning a Treasury obligation, both the government and the Fed will face ruin. ...

Indeed, 10-year Treasury note yields stand near a two-month high.

Moreover, bond yield spreads have widened:

The difference between the yields on two- and 10-year notes widened to 2.54 percentage points, the most since August 2011 as investors demand more to own longer-term securities ... A report showed producer prices fell last month, suggesting inflation is tamed. The Treasury sold $13 billion of 10-year inflation-protected securities at the highest yield since July 2011.

-- Bloomberg, Nov. 21

Worried bond investors may well demand even higher yields down the road.

Bond yields skyrocketed during the Great Depression; the October Theorist also said that the Yellen era will likely have a parallel with former Fed chair Eugene Meyer, who presided over the central bank during the Great Depression.

For a limited time, you can read Robert Prechter's 6-page report to prepare for what EWI sees ahead. In this report you'll learn why the risk of deflation is mounting and how you can see it coming in the prices of gold, gas, real estate, crude oil and other markets. See below for full details.

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This article was syndicated by Elliott Wave International and was originally published under the headline Janet Yellen Is Close to Making History in Two Ways. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

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