Monetary Policy Is Not The First Line Of Defence Says Janet Yellen!

As a currency trader, you need to be an expert in reading what the central banks are doing. One of the most important important central bank is the US Federal Reserve Bank also known as the FED. Janet Yellen is now the Chairperson of FED. In her speech on Wednesday, she said monetary policy has limitations when it comes to promoting financial stability. Monetary policy faces “significant limitations” as a tool to counter financial stability risks, Federal Reserve Chair Janet Yellen said on Wednesday, adding that heading off the U.S. housing bubble with higher interest rates would have caused major economic damage. Weighing in on a global debate, Yellen reiterated her view that regulation – not rate policy – needs to play the lead role in combating excessive financial risk-taking.

She is right. This is the view of the top economists who think that the recent stock market crash happened due to  poor regulation. If the regulatory framework had not been weakened significantly in the 1980s and 1990s, the market crash could have been easily averted. The markets need to be regulated in order to avoid failures. This is what Econ 101 also teaches.

If you have taken a basic course in economics, you should be knowing this fact that monetary policy effects are not long lasting and permanent. Monetary policy is only used to control the economy in the short run. The actual things that drives the economy is the fundamentals like production, education etc. If the workforce is highly trained and skilled, expect the economy to weather short run economic downturns. This is precisely what happened in US economy. Stock market crashed. Financial crisis became very deep. Doom and gloom scenarios got reported in the financial media. But basically US economy is robust, innovative and creative. Look at Facebook, Google, Amazon, Microsoft etc these tech companies are the signs that show the innovation and creation in US economy. So the economy fell, found the bottom and then start making a rise.

So basically what the FED chairperson has said is true. As long as US economy is innovative and creative, it is going to be the leading economy of the world. When innovation and creation wanes in USA and shifts to some other location, that will be the time when US Dollar will tank and alongwith it the US economy. Did you read USD sinks to one months low?