Countparties: The Fed’s unemployment crusader
Welcome to theÂ Counterparties email. The sign-up page isÂ here, itâ€™s just a matter of checking a box if youâ€™re already registered on the Reuters website. Send suggestions, story tips and complaints toÂ Counterparties.Reuters@gmail.com.
[NOTE: Due to technical difficulties, we were unable to send out the Counterparties email this evening. Apologies]
Monetary policy is largely about setting expectations. When the likely future Chairman of the Fed speaks, as Janet Yellen did earlier today, weâ€™re given a glimpse into what what we can expect when Ben Bernankeâ€™s term ends in January 2014.
Today, Yellenâ€™s message was a clear indication that she would continue Bernankeâ€™s strategy of monetary stimulus (aka â€śquantitative easingâ€ť). Why? Hereâ€™s 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 Yellenâ€™s speech was a direct response to the recent bubble bursting rhetoric of Fed Governor Jeremy Stein. Translating brusquely, Irwin says Yellen’s message was, â€śAre 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 moneyâ€ť.
The FTâ€™s Robin Harding says that Yellen supports continuing to refill the economyâ€™s 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 wasnâ€™t 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, thereâ€™s 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 Morganâ€™s Michael Cembalest calls the marketâ€™s â€śtangled, complicated relationshipâ€ť with quantitative easing. — Ben Walsh
On to todayâ€™s links: