Nov 21 (Reuters) – If you want to know what Janet Yellen
will do as Fed chair, ignore her congressional testimony and
watch Ben Bernanke’s lips.
Yellen, approved Thursday by the Senate Banking Committee,
will get the job, but the real action is in speeches by
Bernanke, who is less inhibited as he is on the way out, and in
the Fed minutes, released Wednesday.
Here is how it is going to go: The Fed will taper, probably
early next year, and will try to grease the skids by offering
some kind of forward guidance to ease the pain. A bit of
fiddling with the interest rate paid by the Fed to banks on
reserves is possible too, but a lot less likely.
Forward guidance is fancy central banker talk for making a
sort of a promise, or pledge, to keep rates at a particular
level in the future if particular conditions prevail. In this
case, the forward guidance will probably be to keep rates near
zero until unemployment falls below the current trigger level of
6.5 percent, perhaps as low as 5.5 percent.
“Even after unemployment drops below 6.5 percent … the
Committee can be patient in seeking assurance that the labor
market is sufficiently strong before considering any increase
(in the fed funds rate),” Bernanke said in a speech this week.