Countparties: The Fed’s unemployment crusader

March 4, 2013

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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’re given a glimpse into what what we can expect when Ben Bernanke’s term ends in January 2014.

Earlier this year, Yellen diagnosed the reasons for America’s lackluster post-crisis recovery — and, to the delight of nerds everywhere, she explained it in chart form.

Today, Yellen’s message was a clear indication that she would continue Bernanke’s strategy of monetary stimulus (aka “quantitative easing”). Why? Here’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 Yellen’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, “Are 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”.

The FT’s Robin Harding says that Yellen supports continuing to refill the economy’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 wasn’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, there’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 Morgan’s Michael Cembalest calls the market’s “tangled, complicated relationship” with quantitative easing. — Ben Walsh

On to today’s links:

A terrific guide to the economics and politics of capping EU banker bonuses – FT

The economics of paying for content online – Felix

New Normal
It’s a “golden age” for corporate profits, but not for corporate workers – NYT

Groupon investors Andreessen and Horowitz annotate Groupon CEO’s goodbye memo – Rap Genius

Good Reads
“What if frustration, inconsistency, forgetting, perhaps even partisanship, allow us to be complex social actors?” – Evgeny Morozov

Not surprisingly, the sequester’s cuts will overwhelmingly hurt America’s poor – NYT
Economists may be finally ready to say that slow growth is here to stay – WaPo

Michael Dell should explain why he wants Dell to go private — or he should quit – Dan Primack
Dell shareholder says Einhorn’s plan for Apple is better than Dell’s plan for Dell – WSJ

Pollution is slowing China’s economic growth – FT Alphaville

Paying Facebook to share your link is a lot more effective than sharing it yourself – Nick Bilton

Bill Keller may have made a glaring mistake in his latest NYT column – Greg Sargent

Right On
Deficit reduction is counterproductive – Felix Rohatyn

EU Mess
The cradle of Western civilization has been reclassified as an “emerging market” – Telegraph
Professional clowns upset by comparisons to Italy’s politicians – IBT

“Wal-Mart is the wrong place to put the blame or to expect the solution” to America’s slow growth and rising inequality – Slate

The JOBS Act is the “greatest loosening of securities regulation in modern history” – Steve Rattner

Bernanke recently gave some very indirect hints about the consequences of higher rates – Econobrowser
Is there a Bitcoin bubble? – Scott Sumner

Nasdaq is executing trades at a loss – FT

Maybe US consumers aren’t immune to macroeconomic forces after all – WSJ

Which incredibly long profile of Aaron Swartz should you bother to read? – Adrian Chen

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