Tuesday, April 1, 2014

Yellen’s Rookie Mistake
Janet Yellen, the Fairy Godmother of the Bull Market, spoke yesterday, and stock prices rose. President Ronald Reagan often said that the most terrifying words in the English language are “I'm from the government, and I'm here to help.” In her speech yesterday, Yellen said that she is from the Fed and here to help:
Although we work through financial markets, our goal is to help Main Street, not Wall Street. By keeping interest rates low, we are trying to make homes more affordable and revive the housing market. We are trying to make it cheaper for businesses to build, expand, and hire. We are trying to lower the costs of buying a car that can carry a worker to a new job and kids to school, and our policies are also spurring the revival of the auto industry. We are trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery.
So far, the Fed’s ultra-easy monetary policy seems to have benefitted Wall Street much more than Main Street. In her speech in Chicago, she briefly described the struggle of three workers in the Windy City--Dorine Poole, Jermaine Brownlee, and Vicki Lira--in the labor market. Yellen said, “I see that there remains considerable slack in the economy. … Slack means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill.”

She noted that the Fed has been committed “to do what is necessary to help our nation recover from the Great Recession. For the many reasons I have noted today, I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed.”

How does this square with Yellen’s press conference on March 19? The FOMC had just issued a press release stating that interest rates wouldn’t be raised for “a considerable time” after QE was terminated. During the Q&A session, Yellen was asked to define “considerable.” She seemed to make a rookie mistake by saying, “it probably means something on the order of around six months or that type of thing. But, you know, it depends.” Stocks fell on her comments.

There is still a debate over whether Yellen made a rookie mistake at her first press conference or whether she was wisely signaling a tougher monetary approach to reduce the risk of speculative asset bubbles. Her speech yesterday confirmed my view that she intends to maintain ultra-easy monetary policy until Poole, Brownlee, and Lira have good jobs. Stock prices rose yesterday.

By the way, in her press conference, Yellen added the growth rate in wages to her dashboard of indicators suggesting that there is too much slack in the labor market. In her speech, she specified that she is watching hourly compensation in the Employment Cost Index and average hourly earnings for all employees in private industries. In a footnote, she observed that they’ve been growing no more than 2-1/4%. In her press conference, she said they should be growing 3-4%.
(Based on an excerpt from YRI Morning Briefing)

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