MacroScope

For all the talk about clear communications at the Federal Reserve, central bank Vice Chair Janet Yellen’s speech to the Society of American Business and Economics Writers ran a rather long-winded 16 pages.

However, while Fed board members generally do not take questions from reporters, there was a scheduled audience Q&A which, at this particular event, meant it was effectively a press briefing.

So I asked Yellen, seen as a potential successor to Fed Chair Ben Bernanke when his second term ends early next year, what she thought of Japan’s decision to launch a bold $1.4 trillion stimulus to fight a long-standing problem of deflation and economic stagnation.

This is what she said:

I prefer not to comment on the details of what the Bank of Japan announced. But I’d certainly say that here’s a country that’s suffered deflation for well over a decade and had very weak economic growth.

When you contemplate the fact that nominal income, nominal GDP in Japan today is slightly lower than it was I think 20 years ago – I mean that’s really remarkable and has resulted in all kinds of problems for Japan. So I really think that taking an aggressive approach to try to end deflation is something I certainly understand.

Janet Yellen, the Federal Reserve’s influential Vice Chair and possible future replacement for Chairman Ben Bernanke, delivered an important speech this week. Entitled “Revolution and Evolution in Central Bank Communications,” Yellen traces the deep shift in sentiment towards the importance of policy transparency.

In 1977, when I started my first job at the Federal Reserve Board as a staff economist in the Division of International Finance, it was an article of faith in central banking that secrecy about monetary policy decisions was the best policy: Central banks, as a rule, did not discuss these decisions, let alone their future policy intentions. While the Federal Reserve is required by the Congress to promote stable prices and maximum employment, Federal Reserve officials at that time avoided discussing how policy would be used to pursue both sides of this mandate. Indeed, mere mention of the employment side of the mandate, even by the mid-1990s, was described in a New York Times article as the equivalent of “sticking needles in the eyes of central bankers.”

In her remarks, Yellen endorsed the concept of policy thresholds first championed by Chicago Fed President Charles Evans. Her backing suggests such numerical guideposts for policy – we’ll keep stimulating until jobs improve and as long as inflation doesn’t creep too far from the Fed’s 2 percent target – are effectively a done deal, though it remains unclear how quickly policymakers can agree on the details.