The Yellen Effect: Dove, Hawk, Goose!

When Janet Yellen took the reins as the first female Chair of the Federal Reserve earlier this month, the $4 trillion question on everyone’s mind is how she will handle Quantitative Easing, the government’s growing balance sheet, unemployment, interest rates, and inflation.

While Yellen has recently stated that there will be no major changes to the policies set by former Chairman Bernanke, she also indicated that she would not operate on a “pre-set course.” So what is the meaning of this rather duplicitous language from the woman that now holds the nation’s threadbare purse strings?

Yellen has been described as a strong dove when it comes to the economy because she’s more concerned with unemployment than inflation and believes that federal intervention and stimulus is an effective tool to promote job growth and help prevent job loss. She is also willing to tolerate a slight increase in inflation if it can improve the nation’s unemployment numbers.

So, like her predecessor, Yellen believes in the heavy hand of the Fed. She was one of the architects of the Quantitative Easing measures enacted back in 2008 along with all of its subsequent sequels. She also supports the slow pull back or “taper” that started in mid-December.

In this respect, Yellen is an enthusiastic Keynesian and one that extols expansive, government solutions over free market ones. With the Great Depression as their “great strategy,” Keynesians champion a full-employment ideal and the aggressive role of government during times of economic crisis. In addition to manipulating the money supply, they believe in massive public investment in infrastructure like roads, bridges, railroads, pipelines, ports and public spaces. From the ditch diggers of the Civilian Works Administration and the stimulus thirsty “shovel –ready” jobs of the American Recovery and Reinvestment Act, Keynesians maintain that government can and should run deficits to stabilize the economy, promote full employment, and reduce market volatility.

Yellen’s “dovish” characterization has already resulted in a warm welcome from Wall Street on the hopes that she will keep interest rates low and more federal stimulus readily at hand. Those close to her, however, say that her proclivity for hard facts and figures could turn her dove-like nature hawkish if economic conditions change.

So as she steps out of the shadow of the 14 men who have held the role of Executive Officer of the Board of Governors of the Federal Reserve System, Yellen will clearly chart her own course. She has already admitted that the job growth numbers for December and January surprised her and that job creation is not currently on an acceptable pace. So will she maintain the tapering schedule or apply the emergency brake?

Only time will tell whether Yellen remains a deficit dove or morphs into an inflation hawk. Her recent comments, however, seem to indicate that she may not be through goosing the US economy with cheap money. If the Fed under Yellen continues to finance the federal deficit, maintain an ultra-loose monetary policy, and further compromises the dollar’s appeal as the world’s reserve currency … it could very well set up a breakout period for gold and silver and launch a voracious precious metals bull market for the duration of her tenure.