Tags: Yellen | Fed | rate | increase

Fed Chair Says Little at Jackson Hole Meeting

By    |   Monday, 25 August 2014 07:49 AM

Federal Reserve Chair Janet Yellen delivered a speech Aug. 22 titled "Labor Market Dynamics and Monetary Policy" to the annual Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyo. When the Fed chair speaks it always gets a lot of press attention, partly because this August event usually comes on a slow news day in the "dog days" of the waning summer.

The chair can use the speech to make a significant policy statement, can avoid this by talking about a peripheral subject or can decline to appear at all, as Chairman Ben Bernanke did last year after it was clear he would not be reappointed.

This time Yellen adopted a combination of the first two tactics. She spoke about monetary policy, but she focused on the narrow issue of labor market conditions, and she didn't say much.

At first glance, it appears she has said nothing that departs meaningfully from the testimony she gave to Congress last month. At that time she said that as the Fed completes its tapering of purchases of Treasury and mortgage-backed securities, it plans to maintain an accommodative policy stance by continuing to hold the securities it has bought and by refraining from raising the federal funds rate (FFR) until sometime in 2015.

She also advised that now that the unemployment rate has declined to its original target level but the economy remains sluggish, the timing of any increase in the FFR will depend on the performance of 19 indicators of labor market conditions.

James Stewart of The New York Times, appearing on CNBC, laid out very clearly what the market expects to happen over the next two years, which is a first rise in the FFR around the middle of 2015 and a gradual increase until the FFR reaches 2.5 percent around the end of 2016. The markets received the speech as though nothing has changed, and it was evidently not Yellen's intention to make news on this occasion.

About five years ago a consultant to the Fed remarked to this writer that there was unrest among the presidents of the regional Fed banks regarding the aggressive intervention by the Fed lest it touch off another bout of inflation. In the intervening time, many observers have been surprised by apparent quiescence of the reported inflation indicators, but more voices have been raised among the presidents that perhaps action to raise the FFR should come sooner than mid-2015, while the most enthusiastic interventionists continue to look for evidence to support a delay beyond mid-2015. Cynics such as Euro Pacific Capital's Peter Schiff have questioned from the start whether the Fed would ever take the steroids or training wheels away.

The most intriguing scenario to look out for, one that has been mentioned repeatedly in these articles as a cynical, contrarian view, is that something will happen in financial markets, such as a repeat of last year's "taper tantrum" that will cause the Fed to lose control of the timetable and find itself unable to deliver the promised gradual, measured glide path to the next check point.

Mohamed El-Erian, not a cynic but perhaps a skeptic, has warned that while the Fed is focused on its process, the markets look at the destination of policy. Some surprises are probably in store.

El-Erian has questioned whether the Fed can get the economy growing without touching off another crisis. Cynics would say the Fed and Treasury have already done this.

(A copy of the text of Yellen's speech can be found here.)

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Federal Reserve Chair Janet Yellen delivered a speech Aug. 22 titled "Labor Market Dynamics and Monetary Policy" to the annual Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyo.
Yellen, Fed, rate, increase
Monday, 25 August 2014 07:49 AM
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