I had breakfast last week with Dr. Janet Yellen, President of the Federal Reserve Bank of San Francisco. The breakfast confirmed much of what Starmont has been saying about a slowly improving U.S. economy, and by implication the slow but continuing rise of the stock market.

The Breakfast is one of an ongoing series sponsored by Alex Mehran and his Sunset Development Company, which owns and operates the Bishop Ranch office building complex where Starmont chose to locate its office. Previous speakers have included the Chairman of the Board of Wells Fargo and the President of the Dallas Federal Reserve Bank.

At the breakfasts Alex Mehran asks a number of attendees to report what is going on in their businesses. Last week’s breakfast included reports from firms in the commercial real estate, residential real estate, commercial banking, investments, communications (AT&T), shipping, and personnel (Paychex) businesses.

Their reports were very uniform—virtually all were seeing a slow pick up in their businesses after some very rough years. While none were hiring additional permanent help yet, some were putting on temporary help after having laid people off during the Great Recession.

Dr. Yellen’s talk confirmed that this trend was what the Fed was seeing throughout the country. (Dr. Yellen is professor emeritus in Economics and Business at the University of California, Berkeley. During the Clinton Administration she served as a member of the Board of Governors of the Federal Reserve System and then as Chair of the Council of Economic Advisers. She is rumored to be in line to be nominated by President Obama as the Vice Chair of the Board of Governors of the Federal Reserve System, the number two job after Chairman Ben Bernanke).

Dr. Yellen believes that GDP in the U.S. will rise at an annual rate of 3.0-3.5% over the next 12 months. While this normally would be considered very good growth, she pointed out that at this rate it will take a few years to replace the jobs that were lost during the Great Recession—her estimate is 2013.

She said that the recovery and the economy were very fragile. For this reason she agrees with the Fed Open Market Committee that the Fed Funds rate should stay at exceptionally low levels for an extended period. Starmont believes that we will see interest rates in the marketplace rise starting in the second half of this year as the Fed unwinds the increases to its balance sheet it instituted during the Great Recession, and the Federal Government needs to continue to sell very large amounts of government bonds to fund the deficit.

We are reviewing Client bond holdings in light of this, as the value of outstanding bonds goes down as interest rates go up. We continue to view equities as having more upside than bonds at this time. While Dr. Yellen confined her remarks to the U.S. economy, other economies are growing at a faster pace than what she projects for the U.S., and Starmont is increasing Client allocations to international equities accordingly.

Tags: Dr. Janet Yellen, Federal Reserve Bank, Stock Market, U.S. economy

This entry was posted on Thursday, April 1st, 2010 at 12:26 pm and is filed under Blog, The Market. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.