In the past, stock prices tended to rally on days that Fed Vice Chair Janet Yellen spoke in public forums about monetary policy. That’s because she is a leading dove on the FOMC and has been an unabashed advocate of quantitative easing. Stock prices drifted lower today even though Yellen spoke again, and once again advocated super-easy monetary policy. In her speech, she endorsed proposals by some of her colleagues to tie monetary policy to specific targets for economic variables, particularly the unemployment rate:
Going further, the Committee might eliminate the calendar date entirely and replace it with guidance on the economic conditions that would need to prevail before liftoff of the federal funds rate might be judged appropriate. Several of my FOMC colleagues have advocated such an approach, and I am also strongly supportive. The idea is to define a zone of combinations of the unemployment rate and inflation within which the FOMC would continue to hold the federal funds rate in its current, near-zero range. For example, Charles Evans, president of the Chicago Fed, suggests that the FOMC should commit to hold the federal funds rate in its current low range at least until unemployment has declined below 7 percent, provided that inflation over the medium term remains below 3 percent. Narayana Kocherlakota, president of the Minneapolis Fed, suggests thresholds of 5.5 percent for unemployment and 2.25 percent for the medium-term inflation outlook. Under such an approach, liftoff would not be automatic once a threshold is reached; that decision would require further Committee deliberation and judgment.