Tags: Yellen | rate | Fed | Us

Fed Maintains Soft Posture

By    |   Thursday, 18 December 2014 09:34 AM

Federal Reserve Chair Janet Yellen met with reporters on Dec. 17 to discuss the decision by the Federal Open Market Committee (FOMC) to maintain its accommodative stance on monetary policy for an extended period, surprising apparently only one pundit who thought that the Fed would see the threat of inflation looming and move sooner that it has indicated to raise interest rates.

By contrast, this writer has been saying from the outset that the Fed is stuck on QE-forever, and the economy remains dependent on Fed intervention to underwrite year-end bonuses for Wall Street, an ongoing stock market boom, sluggish economic growth and a still-troubled global banking system. The stock market showed its approval with a triple-digit rally. Yellen is already being hailed in some quarters as a latter-day Maestro, who can manage a risky monetary and regulatory policy without alienating the financial press.

I her opening statement, Yellen explained that the FOMC decided to keep the federal funds rate near zero and to remain "patient" in considering when to begin to raise rates. She hailed evidence that labor markets continue to strengthen, the economy is growing at more than 2 percent and inflation is picking up and moving toward the target of 2 percent.

Yellen stressed again that the forward guidance the Fed expects to maintain accommodative policy for at least the next couple of meetings is "completely data-dependent" and an increase in the target interest rate could be made either sooner or later than now indicated, but "liftoff" is still projected for sometime in 2015 and to rise close to its long-term level some time in 2017.

At the same time, Yellen also repeated her standing admonition that observers should not draw conclusions as to the likelihood of a policy change based on whether a press conference is scheduled in conjunction with a given meeting. It sounded like she really meant it.

She also discouraged a Bloomberg reporter from expecting that once liftoff occurs the Fed will increase rates at the "measured pace" of ¼ percent increments that rules during an earlier liftoff period.

In response to a question from CNBC's Steve Liesman, Yellen, while acknowledging effects on global financial markets, labeled the recent decline in oil prices a net positive for the U.S. economy, because it allows U.S. households to spend less on energy, but she sees the downward effect on inflation as "transitory."

Pedro da Costa of Dow Jones Newswires took the discussion beyond rates (Enough about rates!) and asked Yellen about controversy surrounding the Federal Reserve Bank of New York under the leadership of William Dudley, and he asked Yellen whether she sees the New York Fed "as a black mark on the Fed system because of these recurring scandals." He pointedly asked Yellen whether she has spoken to Dudley about the conduct of the New York Fed, referring to Dudley as "someone who has spent 21 years of his career at Goldman Sachs."

In response Yellen acknowledged the importance of confidence in the Fed's bank supervision program, and she proclaimed that she does "have confidence in the quality of our supervision program," specifically including the largest banking organizations. She also insisted that bank supervision is led by the Board of Governors in Washington and asserted that the Fed "has strengthened the process of supervision enormously since the crisis." Yellen concluded that the Fed's Inspector General has been asked to look into measures to protect the ability of examiners to express independent views.

Another reporter asked whether the Fed is discussing the potential for a Russian default and resulting "contagion" (he could have said "another" Russian default) given that Russia owes Western banks a lot of money. Yellen responded that Russia accounts for only 1 percent of U.S. trade and that the exposure of U.S. banks to Russian nationals is "really quite small relative to their capital." (Someone out there was probably quipping that the capital of the banks is also "really quite small.")

Yellen expressed the expectation that the linkages and spillover effects of such an event would be small, but they would be larger for Europe. One recalls that former Fed Chairman Ben Bernanke gave similar assurances in the foremath of the mortgage bust. To her credit Yellen referred to widening of spreads in high-yield bonds, but then she deferred to the risk management function of banks.

(Archived video can be found here.)

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Federal Reserve Chair Janet Yellen met with reporters on Dec. 17 to discuss the decision by the Federal Open Market Committee (FOMC) to maintain its accommodative stance on monetary policy for an extended period.
Yellen, rate, Fed, Us
Thursday, 18 December 2014 09:34 AM
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