Countparties: The Fed’s unemployment crusader
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Monetary policy is largely about setting expectations. When the likely future Chairman of the Fed speaks, as Janet Yellen did earlier today, we‚Äôre given a glimpse into what what we can expect when Ben Bernanke‚Äôs term ends in January 2014.
Today, Yellen‚Äôs message was a clear indication that she would continue Bernanke‚Äôs strategy of monetary stimulus (aka ‚Äúquantitative easing‚ÄĚ). Why? Here‚Äôs Yellen:
There is the high cost that unemployed workers and their families are paying in this disappointingly slow recovery. There is the risk of longer-term damage to the labor market and the economy’s productive capacity. At present, I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more-rapid growth in employment.
Neil Irwin thinks Yellen‚Äôs speech was a direct response to the recent bubble bursting rhetoric of Fed Governor Jeremy Stein. Translating brusquely, Irwin says Yellen’s message was, ‚ÄúAre you crazy?… Why should we cripple the prospects of economic recovery just because investors may be paying too much for certain types of corporate bonds and end up losing money‚ÄĚ.
The FT‚Äôs Robin Harding says that Yellen supports continuing to refill the economy‚Äôs punchbowl through asset purchases. Yellen also specified the factors that would need to improve in order for her to consider ending the policy: unemployment; employment growth; the job-quitting rate; personal consumption. Monetary policy based on those five metrics is a world away from that of the Greenspan era.
Yellen wasn‚Äôt always such a marked supporter of loose monetary policy. In 2010, she was openly worrying about the next bubble. But if Narayana Kocherlakota can transition from an ultra-hawk to a committed dove, there‚Äôs no reason for Yellen to feel overly tied to her previous comments. Regardless, her next big challenge may be of a completely different sort: unwinding what JP Morgan‚Äôs Michael Cembalest calls the market‚Äôs ‚Äútangled, complicated relationship‚ÄĚ with quantitative easing. — Ben Walsh
On to today‚Äôs links: