There’s a lot to digest in Yellen’s latest speech on inflation, but for now just focus on the contrast between this (emphasis ours):
The evidence suggests that inflation expectations are in fact well anchored at present. Figure 7 plots the two survey measures of longer-term expected inflation I presented earlier, along with a measure of longer-term inflation compensation derived as the difference between yields on nominal Treasury securities and inflation-indexed ones, called TIPS. Since the late 1990s, survey measures of longer-term inflation expectations have been quite stable; this stability has persisted in recent years despite a deep recession and concerns expressed by some observers regarding the potential inflationary effects of unconventional monetary policy. The fact that these survey measures appear to have remained anchored at about the same levels that prevailed prior to the recession suggests that, once the economy has returned to full employment (and absent any other shocks), core inflation should return to its pre-recession average level of about 2 percent. Read more
Forward guidance under Ben Bernanke and then Janet Yellen has been… changeable, notes David Kelly, chief strategist for JP Morgan Asset Management, who shares a reminder of the shifting timescale.
Here’s the Federal Reserve on when it would be appropriate to raise the target range for the federal funds rate:
January 2009 — not “for some time”
March 2009 — not “for an extended period” Read more
Janet Yellen’s thoughtful speech on labor markets last week has already received a lot of attention. One passage, which highlighted some recent research from her former colleagues at the Federal Reserve Bank of San Francisco, was particularly noteworthy, in part for its implications about the path of future wage growth:
The sluggish pace of nominal and real wage growth in recent years may reflect the phenomenon of “pent-up wage deflation.” The evidence suggests that many firms faced significant constraints in lowering compensation during the recession and the earlier part of the recovery because of “downward nominal wage rigidity”– namely, an inability or unwillingness on the part of firms to cut nominal wages.
It is probably the highest profile event on the Fed calendar: the chair’s opening speech at the Kansas City Fed’s symposium in Jackson Hole, Wyoming. The setting is spectacular; the audience runs the world’s central banks. Markets go on high alert for new guidance on policy. To add to the sense of occasion this year, it will be Janet Yellen’s first visit as Fed chair.
The oddity is that Jackson Hole’s reputation as a market mover is largely accidental. It is not an obvious venue for the Fed to communicate policy: what, in fact, could seem more out-of-touch than proclaiming the nation’s economic path from a gorgeous mountain resort in one of the richest zip codes in the USA? It is most likely, therefore, that Yellen’s speech on Labour Markets (the title has been announced) will contain a lot of important analysis but much less red meat on policy. Read more
Janet Yellen says share valuations remain within “historical norms”.
Two words: “irrational exuberance”. Read more
This is an abridged version of a post by Andrew Smithers for his FT blog, one that lays out why using next year’s PE ratio to value the stock market is absurd. Taking the Fed Chair to task for her language, it is also ripost to the critique of long term valuation measures we have also featured.
Janet Yellen, the Fed’s head, rather bizarrely used the prospective price/earnings ratio, one of the weakest of all measures, to justify a statement that Wall Street was not overvalued. (This was doubly strange since her husband, George Akerlof, co-wrote a book with Robert Shiller, who has championed a much better measure…
I quote from a recent Buttonwood column in The Economist. Calling Ms Yellen’s comment “strange” seems very kind. Many people would rate the use of bad data in preference to better as irresponsible rather than strange, particularly when it carries with it the authority of the US Federal Reserve. Read more
Janet Yellen’s speech on Wednesday repeated some of her earlier points about labour market slack — she thinks there is plenty left and hasn’t followed the shifting centre of gravity within the FOMC — and also included remarks on her inflation outlook and the Fed’s new, qualitative forward guidance.
On inflation: Read more
The thresholds had a one-time gig, doing their job so well that they made themselves obsolete. How very New Economy of them.
Well, sort of. According to Janet Yellen’s reasoning for having ditched the thresholds as a part of the Fed’s forward guidance, they served their purpose at a time when it still seemed possible that inflation would climb above the Fed’s target even while the unemployment rate was still well above its natural level. Their presence was meant to reassure markets that the Fed wouldn’t rush to tighten in such a scenario, and in the meantime they also communicated to markets that policy was data contingent rather than calendar-based. Read more
Janet Yellen was less worried than some of her FOMC colleagues in September 2008 that high inflation would remain a problem, and she was also more bearish on the economic outlook:
My contacts also report that their businesses are still raising prices in response to past increases in commodity and import prices that boosted their costs. I expect as a consequence that core inflation will remain uncomfortably high for a while longer, but the marked decline in commodity prices since June reinforces my conviction that there is light at the end of this inflation tunnel. … Read more
New era, and all that. Click the image to read Janet Yellen’s full prepared testimony for her appearance on Tuesday before the Committee on Financial Services, U.S. House of Representatives.
It’s been easy to lose track of the dueling research papers and notes published in the last year that have tried to discern the causes behind the demographic-adjusted fall in the US labour force participation rate.
The resulting confusion, specifically about whether those causes are mainly cyclical or structural, has led to uncertainty about what the Fed will do if the unemployment rate falls to or below the 6.5 per cent threshold (the rate is now at 6.7 per cent). Consequently it has weakened the FOMC’s commitment to keeping rates low for as long as its members have forecast. Read more
Last week we noted the reemergence of Greenspan’s dilemma. Soon no doubt becoming Janet Yellen’s, too.
Very loosely, this is focused on what to do when all conventional economic metrics suggest that it might be time to raise rates, but inflation remains stubbornly grounded regardless.
Kit Juckes at Societe Generale picks up on the theme this Friday:
Once upon a time, we had a whole array of rules to help think about monetary policy -the Phillips curve, NAIRU, the Taylor Rule, even MV=PY (an identity not a rule) and Goodhart’s Law (that anything a central bank targets will mis-behave like a moody teenager). But increasingly, central bankers are throwing away their playbook. In the UK and US, unemployment rate triggers chosen to frame forward policy guidance are set to be revised because they will be reached before the central banks are ready to raise rates. Even at the ECB, there is acknowledgement that the link between economic activity and inflation has ‘become more tenuous in recent years’.
Deficit continues to be a dirty word in the US (despite *those* findings about the holier-than-thou Clinton surpluses not being all that great), whilst the idea that the US is an unsustainable deficit spender increasingly propagates in mainstream circles.
But, as Ethan Harris at Bank of America Merrill Lynch shows on Monday, nothing could be further from the truth. In reality the US deficit is contracting at a relatively speedy rate: Read more
Despite the best efforts of White House insiders, the backlash against the candidacy of Larry Summers to be the next Fed chair proved too much to overcome.
From the scoop by David Wessell of the Wall Street Journal: Read more
Not that we needed more convincing, but…
With the exception of certain commentators who get paid ostensibly to act like inveterate morons, nobody has doubted Janet Yellen’s record of analytical prescience in the past decade. Read more
Most of Janet Yellen’s speech today about commodity prices and the economic outlook was about what you would expect, and we covered many of the same issues in our long discussion last week about inflation expectations.
To summarise, Yellen made the following points: Read more
For the commute home, or while rocking out to Paradise City, or while shielding yourself from the November Rain, or while chasing your Rocket Queen, or while exercising Patience; and because you Don’t Cry, you Live and Let Die,
- Welcome to the jungle: Ex-G’N’R bassist starts wealth management firm. Read more
Here’s a pop quiz for macro fans: Federal Reserve asset purchases were equivalent to an X hundred basis point reduction in the federal funds rate and contributed Y million jobs. What are X and Y?
In a recent paper on zero lower bound events and the impact of quantitative easing, economists at the San Francisco Fed try to find X and Y. Read more
The Fed’s asset-purchase scheme is paying off, with inflation a percentage point higher and 3m more jobs to be added in 2012, Fed vice chair Janet Yellen said at the weekend, citing Fed research, reports the FT. It is the first time a senior Fed official has detailed the benefits of ‘QE2′. The estimates suggest that, if the Fed had not started QE in 2008, the economy would now be close to deflation and 2012 unemployment would be 1.5 percentage points higher. Clearly, says the FT, “something is stirring” in the US economy. Meanwhile, Pragmatic Capitalism “commends” Yellen’s understanding of the banking system, but tears apart most of her comments about QE2′s efficacy.
The US Federal Reserve’s asset-purchase scheme is paying off, with inflation a percentage point higher and 3m more jobs to be added in 2012, Fed vice chair Janet Yellen said at the weekend, citing Fed research, reports the FT. It is the first time a senior Fed official has detailed the benefits of the Fed’s second round of quantitative easing, or ‘QE2′. The estimates suggest that, if the Fed had simply cut rates to zero in 2008 and not started its asset-buying scheme, the economy would now be close to deflation and unemployment in 2012 would be 1.5 percentage points higher. Yellen’s remarks followed Friday’s delivery by Fed chair Ben Bernanke of what MoneySupply called a “dovish” Congressional testimony. Clearly, says the FT, “something is stirring” in the US economy.
Here is a disturbing, though not unfathomable, possibility envisioned by Economics of Contempt:
Let’s say the European sovereign debt crisis flares up again, and one or two Euro banks fail. (Not a bank like UBS or Deutsche Bank, but a medium-sized bank like Bank of Greece or a Landesbank.) That, in turn, causes a U.S. money market fund — many of which have large exposures to Euro banks — to “break the buck,” which leads to another run on money market funds. Read more
US president Barack Obama will on Thursday appoint three new members to the Federal Reserve Board, the Wall Street Journal reports. The US government will choose Janet Yellen, San Francisco Federal Reserve Bank president, to be the board’s vice chairman, and MIT economist Peter Diamond, and Maryland state banking regulator Sarah Bloom Raskin to sit on the board, the WSJ says.
If the Senate confirms the appointments, the NYT notes, they will be launched into planning the Fed’s exit strategy from the emergency loans made over the crisis. Fed officials have begun to debate the merits of selling the bank’s mortgage-related assets.
Whispers around the White House say President Obama is poised to pick Janet Yellen to be the Federal Reserve vice chairman, Reuters has reported. After Donald Kohn’s departure, is it the Fed doves’ time to shine once again?
After all, Yellen, currently chair of the San Francisco Fed, has been outspoken on her belief that the government needs to keep interest rates at exceptionally low rates — and she leans towards growth policies that favour employment over policies to keep inflation down. Read more
Janet Yellen, president of the Federal Reserve Bank San Francisco, has been chosen by US president Barack Obama to replace Donald Kohn as vice chairman of the central bank, Bloomberg reports, citing two people with knowledge of nomination process. The selection is “pending completion of vetting by the Obama administration,” Bloomberg said.
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. Read more