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The public policy blog of the American Enterprise Institute
A “market rattling” press-conference performance from Janet Yellen, and Wall Street is suddenly thick with Ben Bernanke nostalgia. “The more experienced Bernanke knew to avoid clarifying deliberately vague statement language,” wrote JPMorgan economist Michael Feroli in a research note. Feroli was referencing Yellen’s squishy, off-the-cuff remark that interest rate hikes might start earlier rather than later next year, or “about six months” after the end of the central bank’s bond buying program. A “rookie gaff” is how economist Paul Edelstein of IHS Global Insight put it.
Judge the new Fed chair’s debut as you will, but the bottom line is that Fed policymakers now expect rates to be a bit higher in 2015 and 2016 than they did previously. Also of note: The Fed de facto downgraded the efficiency of the US economy as seen in its projection of reduced GDP growth and unemployment. These changes suggest, from the Fed’s perspective, more structural weakness in labor markets and an economy that, the WSJ’s Justin Lahart explains, “generates more inflation at a lower rate of growth — a notion reinforced by the Fed’s stepped-up expectation of when it will be time to raise rates.” Despite the decline in labor force participation and the share of adults working, the Yellen Fed is suddenly concerned about the inflation risk of tight labor markets.
But there is a bigger point here, one identified by Dan Greenhaus, chief strategist at BTIG:
We are not Fed ‘haters’ by any means, but the manner in which policy is currently being conducted is just … too much. The statement is too long; paragraphs 4 and 5 are totally unnecessary as both can be summed up in one sentence. ‘Rates are going to stay low until such time the FOMC feels inflation and unemployment dynamics warrant an increase.’ There, was that so hard? Instead we’re looking at dots. Seriously. Dots.
I’ll go even further here: rather than edging toward a clearer, more rule-based policy – as originally seen in the adoption of the now-discarded Evans rule – the Yellen Fed’s forward guidance is becoming more discretionary. It will factor, according to Yellen, a “wide range of information, including measures of labor market conditions, indicators of inflation pressures, and inflation expectations and readings on financial developments.” The WSJ counted ten different jobs stats on Yellen’s self-described dashboard. This snark from First Trust Advisors economist Bob Stein seems appropriate:
If only there was some measure that took in account a whole bunch of stuff like, I don’t know, nominal GDP! It’s a comprehensive measure whose level the Fed should be targeting as part of a rule-based monetary policy. Good heavens, monetary policy shouldn’t depend on the abilities of one person, on a Great Man or Great Woman, even one as intelligent and experienced as Yellen or Bernanke … or Alan Greenspan or John Taylor or Christina Romer or Glenn Hubbard or your monetary policy expert of choice. Nor should it depend how the central bank “feels” about a slew of factors. Scott Sumner is dead on: The US central bank doesn’t have a coherent policy regime.” And it sure could use one, even more than a smooth-talking, media savvy Fed boss.
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