Forget Kim Kardashian – this is the woman everyone should be watching

Forget Kim Kardashian – this is the woman everyone should be watching

In the 24/7 digital news world, seemingly unimportant socialites and celebrities grab all the headlines and often the truly powerful are forgotten. United States Federal Reserve chairwoman Janet Yellen is one of those forgotten people.

By looking at the Google search volume we can see the difference in interest between three major American public figures: singer Miley Crus (yellow line), socialite Kim Kardashian (red line), and Janet Yellen (blue line). While the two female celebrities dominate in internet search volume, Janet Yellen, the world’s second most powerful woman, I might add, barely registers. Is it any surprise people prefer hearing about the latest drama from Kim Kardashian or twerking saga from Miley Cyrus, than Yellen’s views on the global economy? Boring.

Chart 01: Google search volume between Kim Kardashian, Miley Cyrus and Janet Yellen from 2005-2014  

Source: Google Trends, Rivkin. Data extracted 4 September 2014.

But you should pay more attention to Janet Yellen, because she has more impact on your daily life than you think.

Janet Yellen is, in short, control of U.S. interest rates, which are directly correlated with Australian interest rates. Chart 02 shows the relationship (in that they both move in tandem) between the U.S. and Australian inflation rates (consumer price index) and interest rates (Reserve Bank of Australia cash rate and Federal Reserve funds rate).

Chart 02. US/Australian interest rates and inflation from 1991-2014

Source: Bloomberg, Rivkin, Data extracted 4 September 2014.

Expect a rise in interest rates soon

According to consensus forecasts, the market is expecting a U.S. rate rise as early as the first quarter of 2015, and they expect it to rise to two per cent by the middle of 2016. Janet Yellen also made it publicly clear at the Economic Symposium in Jackson Hole, Wyoming, that she is ready to respond to any threat of inflation amid an improving labour market. 'Responding to inflation' basically means lifting interest rates.

With the U.S. Fed inflation target of two per cent currently being tested, any further rise in inflation will no doubt force action on interest rates. The key concern for market participants is the trillions of dollars in stimulus sloshing around the U.S. and global economy that could spark an outbreak in inflation.

And because almost every asset class in the world is priced using U.S. interest rates, currently sitting at 0.25 per cent, (and because the RBA will likely follow suit with any raises), even the slightest changes in U.S. interest can, for example, change how much you pay off each month of your home loan or credit card bill.

Do you want to spend an extra $1824 (at least) a year?

Let's take your monthly home loan repayments for example. (Same principles apply if you have any other debt.)

If the RBA and U.S. Fed raise rates early next year by 0.25 per cent, on a 25-year 5.75% variable $1 million home loan, monthly payments will increase around $152; an increase of 0.75% will add an additional $461 per month.

And with U.S. interest rates in the sitting at record lows for the last five years, it won’t take much to see rates rise well over one per cent, to more historical norms. This could mean we’ll see RBA also respond and move rates by over two per cent to more historical normal levels: above four per cent.

The second most powerful woman in the world is unknown when compared to celebrity names such as Miley Cyrus and Kim Kardashian. With so much at stake in the global economy and with global interest rates about to rise for the first time since the global financial crisis, maybe it’s about time to start paying more attention to the lesser known and more important name of Janet Yellen.

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