How will the new US Secretary of the Treasury Janet Yellen effect the Economy and the Stock Markets?

Podcast: How will the new US Secretary of the Treasury Janet Yellen effect the Economy and the Stock Markets?

President elect Joe Biden nominated Janet Yellen as the 78th United States secretary of the treasury. In my opinion, Janet Yellen will support aggressive fiscal stimulus of the US economy at the beginning of her new job. Her prior experience as the chair of the Fed will create a bridge and very favorable relationship between the current Fed chairman Jerome Powell and the US Treasury Department. Both Yellen and Powell share similar interests in helping the economy and unemployment first at the expense of short-term increase in inflation. Her prior job history and academic research show great interest in fighting inequality and unemployment. Even energy sector may do very well during the current administration. 

Before her current nomination, Dr. Yellen has also worked as the chair of the Fed. Janet Yellen succeeded Ben Bernanke as the chair of the Board of Governors of the Federal Reserve System in February 2014 and held the position for four years (the Federal Reserve History). During her leadership at the Fed, the interest rates went from zero in 2014 to 1.25%-1.5% by February 2018 (Open Market Operations). Dr. Yellen first voted to increase interest rates by 0.25% in December 2015 when unemployment was at 5%. The second interest rate hike by another 0.25% was a year later when unemployment dipped to 4.7% in December 2016. Dr. Yellen waited a year and took time to watch and make sure unemployment continued to decline before raising interest rates. She is considered more dovish economist who prefers to have lower interest rates and lower unemployment. Her economic believes are shared with the current Fed chairman Jerome Powell. Mr. Powell also likes to see the economy and unemployment improve at the expense of any short-term increase in inflation. He is also considered a dovish economist.  

Dr. Yellen has written research on labor economics and believes in the specific level of full employment (Barron’s). When economy reaches the full employment, the government should start withdrawing stimulus policies. Right now, we are in the opposite situation – when economy is far from full employment. The recent increase in unemployment should provide additional reasons for Dr. Yellen to support more aggressive fiscal stimulus. According to the U.S. Bureau of Labor Statistics, the unemployment rate has risen from 3.5% in February 2020 to 6.7% in November 2020. 

Dr. Yellen has studied and wrote about growing inequality as a big concern. Inequality got even worse during the Covid-19 pandemic. Many low-income jobs were lost. The Main Street felt much pain and has not recovered from the pandemic still. In contrast, the Wall Street saw the stock prices fully recovered and even reached new record levels. Wealthy people own most of the stock market and their wealth increased during the pandemic widening the inequality gap. The richest one per cent of Americans own more stocks than half of the US households, according to the Goldman Sachs (Financial Times). Also, the top one per cent of Americans own 31% of all household wealth. In contrast, the bottom 50% of Americans own only 2% of household wealth according to the Federal Reserve. These statistics should support more aggressive fiscal stimulus, especially for lower income families. We should expect more stimulus checks being mailed early in 2021.  

Fiscal stimulus in form of check payments to low-income families will fuel the economic recovery. Most low-income families will spend the entire stimulus payment fast contributing to economic growth. The multiplier effect on the economy by issuing stimulus checks will be much greater than the original amount on the checks. The multiplier effect may be felt by the banking system which will receive some of the deposits and will be able to lend more money out. By spending money on goods and services, the multiplier effect will pass on extra income to producers and sellers of goods and services. As the result, companies and the stock market may also benefit from additional spending. Some stimulus money may even be used directly to purchase stocks. However, I would argue that low-income families may not have the luxury to afford stocks. 

Dr. Yellen has advocated for climate improvement through carbon tax and dividend (Barron’s). Big energy companies will either pay or earn dividend based on the pollution levels produced. It may have a negative effect on profitability of big energy companies. However, the carbon tax and dividend are not a new phenomenon. The increase in economic growth due to stimulative fiscal and monetary policies will outweigh negative effect of carbon tax. Energy sector may also do well during new administration. Janet Yellen as a new secretary of the treasury should be very positive for economic recovery and labor market. Both the treasury department and the Fed should be on the same page and willing to do everything to lower unemployment and stimulate economic growth. Fiscal policies have quick, instantaneous effect on the economy. With the new expected round of stimulus checks and other financial help, we will see economy improving right away. At the same time, the Fed will also continue to pursue stimulative monetary policies that have more long-term effect on the economy. The new administration is shaping out to be very good for the economy which needs help. 

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References: 

Barron’s, Who Is Janet Yellen, Biden’s Pick for Treasury? Former Fed Chief Has a History of Hits and Misses; https://www.barrons.com/articles/who-is-janet-yellen-bidens-pick-for-treasury-former-fed-chief-has-a-history-of-hits-and-misses-51606175101

Financial Times, How America’s 1% came to dominate equity ownership; https://www.ft.com/content/2501e154-4789-11ea-aeb3-955839e06441

The Federal Reserve History, https://www.federalreservehistory.org/people/janet-l-yellen

Data:

Open Market Operations, https://www.federalreserve.gov/monetarypolicy/openmarket.htm

The Federal Reserve, Distribution of Household Wealth in the U.S. since 1989; https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/#range:2005.3,2020.3;quarter:124;series:Net%20worth;demographic:networth;population:1,3,5,7;units:shares

U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, January 19, 2021.

Disclosures: 

The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor, before making an investment decision. Neither ECNFIN.COM nor its author are responsible for any damages or losses arising from any use of this information. ECNFIN.com and its podcast are not associated with nor do they necessarily represent the opinion or advice of Epiqwest Culver Wealth Advisors LLC.  Past performance doesn’t guarantee future results.

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