Yellen’s remarkably unremarkable news conference – and why it’s a good thing
John Maynard Keynes famously said that his highest ambition was to make economic policy as boring as dentistry. In this respect, as in so many others, Federal Reserve Chair Janet Yellen is proving to be a loyal Keynesian.
Yellen‚Äôs second news conference as Fed chair conveyed no new information about the timing of future interest rate moves. She gave no hints about an ‚Äúexit strategy‚ÄĚ for the Fed to return the $3 trillion of bonds it has acquired to the private sector. She told us nothing about the Fed‚Äôs expectations on inflation, employment and economic growth — not even about the board‚Äôs views on financial volatility, regulation, asset prices or bank credit policies.
Yellen refused even to repeat, or repeal, her earlier answer to a question about the meaning of the ‚Äúconsiderable period‚ÄĚ she expected between the end of tapering and the first rate hike. At her first news conference, Yellen responded to a similar question by blurting out ‚Äúsix months.‚ÄĚ This caused an eruption of volatility in financial markets — that lasted about five minutes.
This time Yellen decided to do no such favors for the high-frequency traders on Wall Street. Instead she gave the same frustrating answer to every question about the Fed‚Äôs future plans: ‚ÄúIt depends.‚ÄĚ
To quote one of many examples: ‚ÄúThere is no mechanical formula whatsoever for what a considerable time means. It depends on how the economy progresses. We will be looking at the progress we make in achieving our labor market objective and inflation objective.‚ÄĚ
Adding insult to injury, she added that the Fed‚Äôs assessment of these two key objectives would, in turn, ‚Äúdepend‚ÄĚ on a host of other economic indicators, ranging from the behavior of ‚Äúdiscouraged‚ÄĚ workers to indicators of productivity growth.
Many Wall Street Fed watchers and media pundits reacted with indignation. They mocked Yellen as the ‚Äú‚ÄôIt Depends‚Äô Central Banker.‚ÄĚ They accused her of discrediting the ‚Äúforward guidance‚ÄĚ that the Fed had been using to control bond prices, risking financial chaos because ‚Äúthe markets hate uncertainty.‚ÄĚ
They simultaneously attacked her for suppressing financial volatility, which deprived investors of any reason to trade. How, after all, could investors make trading decisions if the Fed refused to tell them what to do?
But the real question raised by Wednesday‚Äôs remarkably unremarkable news conference was different: Why did investors, who supposedly hate uncertainty, seem so happy with Yellen‚Äôs ‚Äúit depends‚ÄĚ approach? Wall Street hit a new record high in response to her boring comments, completely rebounding from the geopolitical shock from events in Iraq.
The answer lies in an observation I made in a column in May last year (and repeated here, here and here), when global financial markets suffered their ‚Äútaper tantrum‚ÄĚ in response to then Fed Chairman Ben Bernanke‚Äôs overly enthusiastic efforts to lay out the Fed‚Äôs plans for monetary policy too clearly and much too far in advance.
This experience suggested a view of monetary policy diametrically opposed to the academic consensus based on the monetarist theory of ‚Äúrational expectations,‚ÄĚ which calls for ‚Äútransparency‚ÄĚ and rule-governed predictability in central banking.
Yet a central bank that promises slavish obedience to pre-determined rules, or to targeted economic outcomes, tends to increase financial uncertainty instead of reducing it. Because such theoretical promises can never be credible in the real world of post-monetarist policy, where central banks are required not simply to hit an inflation target but also to balance a host of objectives on unemployment, inflation, financial stability and gross domestic product growth.
As Yellen said, ‚ÄúIt is important for market participants to recognize that there is uncertainty [in the Fed‚Äôs views] about the path of interest rates and that this uncertainty is necessary, because there is uncertainty about what the path of the economy will be.‚ÄĚ
She then went on to explain that there is now ‚Äúno conflict whatever in achieving our employment and inflation objectives — they both require a highly accommodative monetary policy.‚ÄĚ
In the future, however, Yellen noted that deviations would inevitably arise and the Fed would follow a ‚Äúcontrol-engineering‚ÄĚ approach:
Whenever inflation or employment are away from their mandate-consistent levels, it will always be the objective to get them back in the medium term. In doing this, the committee will follow a balanced approach ‚Äď whenever we see a conflict between our two objectives, we will consider just how far we are from each of our objectives and if the distance from achieving an objective is particularly large, it would be consistent that we would tolerate some movement in the opposite direction on the other objective.
If investors decide that the Fed will behave like a good Keynesian dentist — responding to the same data that is available to all market participants and using the information pragmatically to keep several policy objectives within reasonable ranges — then monetary policy ceases to be an independent source of mystery and financial uncertainty. It instead becomes a dependent function of incoming economic data.
Provided economic data remain reasonably predictable and stable, as it now seems to be in the United States, investors can devote less time to psychoanalyzing central bankers and focus instead on the prospects and valuations of individual businesses, sectors or geographical markets. That, as I wrote two weeks ago, is a recipe for a continuing bull market on Wall Street. At least until valuations get dangerously high.
PHOTO (TOP): Federal Reserve Chair Janet Yellen holds a news conference following two-day Federal Open Market Committee meeting at the Federal Reserve in Washington June 18, 2014. REUTERS/Jonathan Ernst
PHOTO (INSERT 1): Traders work at the kiosk that trades Time Warner Cable on the floor of the New York Stock Exchange February 13, 2014. REUTERS/Brendan McDermid
PHOTO (INSERT 2): Former Federal Reserve Chairman Ben Bernanke in Washington November 2, 2011. REUTERS/Jason Reed