Secretary Yellen shifts the fiscal policy goal posts

by Shaun Richards

The weekend just gone brought with it a clear hint of economic policy ahead. It came from the US Treasury Secretary Janet Yellen who is in the process of making something of a transition. Like Mario Draghi in Italy she is making the switch from supposedly independent central banker to politician. Both as they have emerged from their chrysalis have become advocates for fiscal policy but Janet is taking things a step further.

G7 economies have the fiscal space to speed up their recoveries to not only reach pre-COVID levels of GDP but also to support a return to pre-pandemic growth paths. This is why we continue to urge a to shift in our thinking from “let’s not withdraw support too early” to “what more can we do now.” Not just to end the pandemic, but to use fiscal policy to invest in addressing generational issues like climate change and inequality.

She has clearly gone further than this below which we had become used to.

Fiscal policy has an important role to play in responding to crises and supporting the recovery. The IMF projects that the U.S. will be the first G7 economy to return to its pre-pandemic output level. That’s in part due to our rapid vaccine rollout, but also ambitious fiscal support in policies like the American Rescue Plan.

So as well as the fiscal plan to get the US economy going again we can expect “More,More, More” from the Biden administration. Indeed in her replies to the press Secretary Yellen offered the same prescription to everyone else.

And we think that most countries have fiscal space, and have the ability to put in place, fiscal policies that will continue promoting recovery and deal with some of the long-run challenges that all of us face when it comes to climate change and inclusive and sustainable growth, and we urge countries to do that.

This is a challenge to what we were told at the end of last month by the President of the German Bundesbank Jens Weidmann.

“It must be clear to all that we are not putting monetary policy into the service of fiscal policy,” the Bundesbank President said. “It is essential to keep fiscal assistance measures targeted and temporary to reduce the likelihood of conflicts arising between monetary and fiscal policy.”

Indeed Jens then if anything went further here.

Mr Weidmann also cautioned against letting the current high degree of government intervention in the economy become the new normal.

A Worldwide Move

As well as the promises of US action and urges for other developed nations to do the same there was this.

The G7 reiterated our support for a new allocation of IMF Special Drawing Rights to boost global reserves and provide additional liquidity as IMF members confront the crisis. We strongly support the IMF providing clear, tailored guidance to countries on how best to utilize their new SDRs, as well as proposals to increase transparency in and accountability for how SDRs are used.

There is a merging of monetary and fiscal policy here. At the start this is an expansion of the world money supply via an increase in SDRs. But it will quickly become fiscal policy as the IMF spends the funds that have just been raised. Politicians love this sort of thing because it is near to a “free lunch” they will get because there is no-one with any ability to object such as those pesky voters.

We wait to see how much of an increase there will be in this.

So far SDR 204.2 billion (equivalent to about US$293 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis.

The US Treasury has previously suggested this.

To this end, Treasury is working with IMF management and other members toward a $650 billion general allocation of SDRs to IMF member countries.

As you can see it would be quite an expansion and perhaps at some point they will key us know who needs global reserve assets? Apart from them of course.

Addressing the long-term global need for reserve assets would help support the global recovery from the COVID-19 crisis

Back in the USA

Before we reach the international environment there are a couple of elephants in the room as we note the subject du jour appearing again.

Q: I guess some people would say seeing U.S. inflation where it is, seeing the serious sheer size of the public deficits, not just in your country but around Europe, you’re now saying go even further.

Which got this response.

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SECRETARY YELLEN: Well, we have in recent months seen some inflation. And we, at least on a year-over- year basis will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3 percent.

If she is a De La Soul fan then there is some logic to this.

That’s the magic number
Yes it is
It’s the magic number

But in reality she is trying to get away with as small a number as she can. Also I am sure you were all waiting for this bit.

But I personally believe that this represents transitory factors.

As everything ends she will be right but we may all be poorer well before then. Also she seems to be doing some cherry-picking.

 without affecting the underlying inflation rate

Like house prices which do not appear in either of the 2 main inflation measures? Ignoring something rising at over 10% per annum and replacing it by something rising at more like 2% helps you tell people inflation is low. The problem comes when they have to actually pay their bills.

In essence Secretary Yellen is saying the US government is targeting this.

Look, we still have over 7 million fewer jobs right now than we had pre-pandemic.

The catch is the assumption that fiscal policy fixes all ills. No doubt some will benefit but if the numbers are a result of structural changes in the economy others may not.


When interviewed by Bloomberg Secretary Yellen gave a different perspective.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said Sunday in an interview with Bloomberg News during her return from the Group of Seven finance ministers’ meeting in London.

This is an issue we looked at on the 5th of May when Secretary Yellen also seemed to think she still had her old job as head of the Federal Reserve. Actually whilst we did see a shift upwards in bond yields earlier this year they have if anything retraced a little in the last couple of months.


There is a clear attempt here to open a path to more expansionary fiscal policy outside the US. Whilst it does not get a mention ( with may be very revealing) this is an issue for a fiscal stimulus.

The U.S. monthly international trade deficit increased in March 2021 according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit increased from $70.5 billion in February (revised) to $74.4 billion in March, as imports increased more than exports.

Expansions elsewhere and hence more demand for US exports would help with this.

The next issue is inflation as we get told that any response will be too late.

And while we’re seeing some inflation, I don’t believe it’s permanent. But we will watch this very carefully. I don’t want to say, “this is mind absolutely made up and closed.” We’ll watch this very carefully, keep an eye on it and try to address issues that arise if it turns out to be necessary.

It looks as though we will be discussing the fiscal multiplier ( how much bang you get for your buck) quite a bit over the next year or two.




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