Rebel Yellen?

The stock market jeered at Janet Yellen’s first press conference as chairwoman of the Federal Reserve, tumbling when she hinted at the Fed’s plans for the coming year. In an ordinary world, stock market drops are a bad sign. But when your economy is run by the Federal Reserve, as ours has been for the past five years, what used to be bad actually is good.

Yellen’s faux pas, as the markets saw it, was to suggest that the Fed might finally start to raise interest rates in “something on the order of around six months” after it ends the massive bond buying program it has engaged in for the past few years. This means the Fed could finally raise interest rates from their current near zero levels in spring 2015, which is sooner than the markets expected.

The Fed has tried to manipulate the economy by keeping interest rates low and buying $85 billion of bonds every month. Low interest rates are supposed to entice businesses and homeowners to borrow. The bond buying—which the Fed calls “quantitative easing” and has recently begun to reduce—is simply a way to print money.

Thanks to the Fed’s policies, the S&P 500 is up 160 percent since March 2009. Zero interest rates mean that safe investments like bank accounts, certificates of deposit, and even money market funds offer almost no return at all. Investors have responded by pumping money into stocks and other investments in their search for returns.

Soaring stock markets aren’t all bad, of course, but the Fed’s manipulations are costly in three ways. First, the Fed’s easy money policy may be creating another bubble like the real estate bubble (also caused in large part by the Fed) whose bursting caused the 2008 crisis. It is unclear just where the bubble is, but we could be in for another disaster if it pops.

Second, the no-interest environment has been devastating for retirees and those who are near retirement. Everyone who moved savings out of the market, and into CDs or bank accounts, has been punished for his or her prudence. It is only a slight exaggeration to say that the Fed’s policies have discriminated against the middle-aged.

Finally, the policies have exacerbated the income inequality that many of the cheerleaders for the Fed’s policies point to as America’s biggest problem. The 1 percent have been big beneficiaries of the stock market bubble. The poor and lower middle class have not.

Yellen’s comments were good news, not bad. The problem is that it’s not clear the Fed really will start to raise interest rates early next year. Yellen left herself plenty of wiggle room, and she, like her predecessor Ben Bernanke, favors easy money until the economy is back on its feet.

Many years ago, another Fed chairman said that the Fed’s job is to take the punch bowl away (by raising interest rates) just when the party gets going. Chairwoman Yellen put her hand on the punch bowl at her first news conference. She didn’t actually promise to pick it up, but here’s hoping she does.