The bottom line of Janet Yellen’s presentation in Vancouver was clear enough, and has already found its way into the market’s calculations of Fedspeak. She said: “I consider the current level of monetary accommodation to be appropriate.”

In other words, she does not think the Fed needs to cut rates again.

But her presentation was not optimistic, even if she closed with the belief that the Fed’s work on interest rates is done for now. Indeed, her speech, accompanied by numerous charts, was thoroughly downbeat. On her version of events, “The single most important determinant of the level and change in subprime delinquency rates has been the pace of house price changes”. As the fall in house prices, unprecdented in its severity in the US, took hold, so it became more likely that subprime borrowers would simply surrender their keys.

Given this view, her prediction for house prices is worrying: “The bottom line is that construction spending and house prices seem likely to continue to decline well into 2009.” That is considerably more bearish than the current popular view in the markets.

On another critical issue of the day, commodity prices, she made clear that the Fed’s charter applies to “headline” inflation (including food and oil). These items are a big part of consumers’ daily purchases, and so they cannot be excluded – the Fed’s obligation is to keep headline inflation down, not just the core.

There is a popular theory that the Fed’s easy money policy has contributed to the run-up in commodities, as it has driven new investors into the sector. Investment demand has risen for commodities, and may also have been boosted by the perceived riskiness of debt and equity.

She raised this, but argued against it: “If this factor were playing a significant role, I would expect to see big increases in inventories of commodities as investors were expecting to make profits on rising prices. So far, I have not seen the evidence that this is occurring.”

Should it be the Fed’s responsibility to stop asset bubbles (possibly including the current rise in commodity prices) from occurring? As Krishna Guha has reported, the Fed is now wrestling with that problem. Yellen suggested not, saying she had never believed that monetary policy should be used to attack bubbles. Often it is unclear whether there is a bubble, she pointed out.

As for the US housing bubble, which the Fed must wish it had burst earlier, she suggested that there were tools other than monetary policy that could have been used – such as stronger supervision and tighter capital requirements.

Short View columnist John Authers is blogging for FT Alphaville from Vancouver at the annual gathering of the CFA Institute

This entry was posted by John Authers on Wednesday, May 14th, 2008 at 17:03 and is filed under Capital markets, People. Tagged with janet yellen. Edit this entry.