Tags: Yellen | Cohen | Fed | Feldstein

Yellen Gives Further Guidance on Tapering

By    |   Monday, 21 April 2014 10:04 AM

Federal Reserve Chair Janet Yellen appeared before the Economic Club of New York April 16 to deliver her first speech on the Fed's monetary policy. The speech was followed by questions by two designated questioners — the legendary bullish pundit Abby Joseph Cohen, a senior investment strategist at Goldman Sachs and vice chair of the Club, and the famed Harvard economist Martin Feldstein.

Readers may want to follow the link below and watch long enough to check out the scene and the pomp. There appeared to be at least four rows of head tables with roughly 80 people seated looking forward. Yellen was introduced by Roger Ferguson, chairman of the Club, who modestly did not mention that he himself is a former vice chairman of the Federal Reserve.

The roughly half-hour speech included the usual economic outlook, along with an excruciatingly detailed rendition of the history of the extraordinary programs the Fed has resorted to in order to stimulate (simulate?) the economy in the wake of the 2008 episode of the ongoing financial crisis and some significant remarks about Topic A, namely when the Fed intends to order what Yellen called "lift off," setting the federal funds rate above the zero lower bound where it has languished for several years and is likely to remain for at least a couple more.

Yellen's survey of the economy, similar to the one she recently presented in congressional testimony, found that "the recovery has come a long way," with a resurgence of the auto industry and a housing market that still has far to go. Most of all she was clearly buoyed by the fact that mainstream forecasts that the Fed tracks have started to include expectations of fuller employment as part of their forecasts, but this is still projected to be longer than two years away.

In summary, the outlook of the Federal Open Market Committee (FOMC) is for a gradual return during two to three years to economic conditions consistent with the Fed's mandate, now interpreted as full employment coupled with inflation of at least 2 percent. While some recent numbers have suggested that the economy has slowed somewhat since last fall, the FOMC views these indicators as largely weather-related.

The bottom line is that the FOMC believes that accommodative monetary policy will be in order for the next couple of years, but it will change this policy if economic conditions warrant. Yellen described in detail, as she did to Congress, the plans the FOMC has to monitor labor market conditions more extensively now that the unemployment rate has reached 6.7 percent on its way to what the FOMC expects to be 5.2 percent to 5.6 percent by the end of 2016. The FOMC will also be looking to increase inflation to meet its 2 percent target and perhaps exceed it by as much as 0.5 percent.

During the somewhat stilted Q&A, Cohen offered a softball question on difficult conditions in the labor market and a second question that touted the presumably stronger U.S. banking system compared with its EU competitors. Feldstein's questions were telling in that they reflected his concern that the Fed might keep the accommodation in place so long that inflation will exceed the Fed's target.

Yellen has insisted that the Fed "has the tools" to engineer a soft landing. A cynic might suspect that Wall Street is holding out hope that the economy will falter, tapering will be suspended and monetary accommodation will remain in place indefinitely.

(Archived video can be found here. A copy of Yellen's speech can be found here.)

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Federal Reserve Chair Janet Yellen appeared before the Economic Club of New York April 16 to deliver her first speech on the Fed's monetary policy.
Yellen, Cohen, Fed, Feldstein
Monday, 21 April 2014 10:04 AM
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