Wednesday, March 18, 2015

Yellen’s Mindbender
In her congressional testimony on February 24, Fed Chair Janet Yellen reiterated that Fed policy is data dependent:
Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2 percent objective.
There’s no doubt that labor market indicators continue to improve. Since her testimony, we learned that the total number of job openings rose to 5.0 million during January, the highest since January 2001. Quits rose to 2.8 million, the highest since April 2008. The NFIB reported that the percentage of small business owners with job openings soared to 29% during February, the highest since April 2006.

Nevertheless, in their meeting yesterday and today, the members of the FOMC must have voiced some concerns about whether the recent weakness in other economic indicators is weather related or not. They are dependent on data that may be hard to read right now. Can they be reasonably confident that the economy is doing well enough to push inflation back toward 2% over the medium term (whatever that means)?

As we await the Fed’s latest decision this afternoon, let me highlight this priceless quote from Yellen’s latest testimony:
The FOMC’s assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. Before then, the Committee will change its forward guidance. However, it is important to emphasize that a modification of the forward guidance should not be read as indicating that the Committee will necessarily increase the target range in a couple of meetings. Instead the modification should be understood as reflecting the Committee’s judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting.
Let’s see how Yellen updates this mindbender at her press conference this afternoon.
(Based on an excerpt from YRI Morning Briefing)

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