Saturday, September 20, 2014

Yellen’s Fed is Full Speed Ahead

Financial FAQs

Is it possible? The Federal Reserve is now more interested in creating wealth for the many, rather than fighting inflation for the wealthiest worrying about their bond prices, as it has in the past? This may seem counterintuitive, since inflation hurts everyone. But when there’s so little inflation at present, it makes more sense to focus on building the assets of those who have the least.

pce

Graph: Econoday

The condition of lower-income families in America is “sobering” even as the economy recovers, Federal Reserve Chairwoman Janet Yellen said in a speech she prepared for delivery at a conference sponsored by the Corporation for Enterprise Development.

“We have come far from the worst moments of the crisis and the economy continues to improve, but the effects of the recession are still being felt by many families, particularly those that had very little in savings and other assets beforehand,“ said Yellen.

This followed one day after the release of FOMC minutes from the last meeting, which reiterated their decision to maintain low interest rates “for the forseeable future.”

There is another reason for maintaining low interest rates. Housing sales need to pick up. There were 670 thousand total housing starts during the first eight months of 2014 (not seasonally adjusted), up 8.6 percent from the 617 thousand during the same period of 2013 (red column on graph).  Single family starts are up just 3 percent, and multi-family starts up 23 percent, because rental housing is in such demand. There are still too many households that cannot afford to buy in this market, especially new generation millennials and first-timers.

starts

Graph: Calculated Risk

But some good news is that the Federal Reserve just published its Q2 Flow of Funds report that showed total household net worth has surpassed pre-recession levels. Net worth previously peaked at $67.9 trillion in Q2 2007, and then fell to $55.0 trillion in Q1 2009 (a loss of $12.9 trillion). Household net worth was at $81.5 trillion in Q2 2014 (up $26.5 trillion from the trough in Q1 2009).

And even though the Fed estimated that the value of household real estate increased to $20.2 trillion in Q2 2014, the value of household real estate is still $2.3 trillion below the peak in early 2006.

So the Fed must continue its efforts to help Americans build assets, she said. The financial crisis showed that many American families are economically vulnerable, with few assets to fall back on in times of distress. Families with assets are able to deal with unexpected expenses as bumps in the road but “families without these assets can end up, very suddenly, off the road,” Yellen said.

For most Americans building up assets means building up equity in their homes, so with $2.3 trillion in value to make up, it will take more patience by the Fed in holding down interest rates.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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