Yellen on rates, regulation, communication

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YellanHand

Reuters.

Janet Yellen, a key force behind the US Federal Reserve's unprecedented and controversial efforts to boost the US economy, was confirmed by the US Senate on Monday to lead the central bank just as it begins to unwind that stimulus. - Reuters

Janet Yellen was confirmed by the US Senate on Monday to become the next chair of the Federal Reserve as it begins to map its way out of its unconventional monetary policy.

The US central bank has held benchmark interest rates near zero for five years and quadrupled its balance sheet to about $4 trillion through three massive bond-buying programs.

As those efforts bear fruit, Yellen is expected to extricate the Fed from its super-easy policy stance, first by managing further reductions to the central bank's bond buying and, eventually, by raising rates from rock-bottom levels.

Her approach to that delicate task will be informed by views shaped through decades of policymaking and research.

A snapshot of those views follows:

 

JOBS

As the Fed's vice chair since 2010 and the chief of the San Francisco Fed before that, Yellen has helped shape the Fed's ultra-easy monetary policy.

She is not shy about her belief, at odds with some of her more traditionally minded colleagues, that the Fed can do a lot to alleviate unemployment.

In a speech on March 4, she said that progress in the labor market should “take center stage” in monetary policy.

“I consider it imperative that we do what we can to promote a very strong recovery,” she said at her confirmation hearing in November. “We're doing that by continuing our asset purchase program, which we ... put into place with the goal of assuring a substantial improvement in the outlook for the labor market.”

 

INFLATION

Yellen believes that it is rare for the Fed's two goals - maximising employment and keeping inflation low and stable - to conflict.

But when they do, she said in 1995, “a wise and humane policy is occasionally to let inflation rise even when inflation is running above target,” if doing so allows the Fed to bring down unemployment more rapidly.

Given her stance, some critics worry Yellen could let inflation spin out of control.

But her credentials also suggest she will be keeping a watchful eye.

In 1996, she urged then-Fed Chairman Alan Greenspan to consider raising rates to head off inflation, and just as she has never dissented on a rate-cutting decision, she also has never withheld her support in a vote to raise rates.

 

QUANTITATIVE EASING

Yellen has backed the Fed's bond buying, saying its benefits exceed its costs.

She voted, however, in favour of the Fed's December 18 decision to modestly trim the pace of its monthly bond purchases to $75 billion from $85 billion.

“There are dangers, frankly, on both sides of ending the program or ending accommodation too early,” Yellen told senators in November. “There are also dangers that we have to keep in mind with continuing the program too long or more generally keeping monetary policy accommodation in place too long.”

 

FORWARD GUIDANCE

The Fed is trying to keep downward pressure on long-term borrowing costs by promising not to begin raising overnight rates at least until the unemployment rate drops to 6.5 percent, provided the outlook for inflation remains under 2.5 percent.

It tweaked that pledge on Dec. 18, saying it likely would be appropriate to keep rates near zero “well past the time” that the jobless rate fell below 6.5 percent, especially if inflation expectations remained below target.

The jobless rate in November was 7.0 percent.

Despite the shift in language, some economists continue to think the Fed may decide to lower the jobless rate threshold as a way to signal a steadfast commitment to low interest rates.

Yellen has not tipped her hand on her views, but she has suggested rates could stay low regardless.

“(T)he thresholds are not triggers,” she said in a letter to a senator in November.

“Monetary policy is likely to remain highly accommodative long after one of the economic thresholds for the federal funds rate has been crossed.”

 

ASSET BUBBLES

One criticism of the Fed's ultra-easy policy stance is that it could inflate another asset bubble.

Yellen has consistently shot down those concerns.

Still, she has hinted at a more muscular approach to regulation and the possibility she would support using monetary policy if needed to keep bubbles from destabilizing the financial system.

“I absolutely believe that our supervisory abilities are critical, and they're just as important as monetary policy,” she told senators. “I would not rule out using monetary policy as a tool to address asset price misalignments, but because it is a blunt tool ... I would like to see monetary policy used first and foremost towards achieving those goals Congress has given us, and to use other tools in the first instance to try to address potential financial stability threats.”

 

TOO BIG TO FAIL

Yellen believes that policymakers are making progress on addressing the problem of so-called too-big-to-fail financial institutions, but wants banks to hold more capital and meet higher liquidity and supervision standards.

 

COMMUNICATION

In January 2012, the Fed adopted an explicit inflation target, a step that Yellen had long pushed for inside the once-secretive institution.

“The challenges facing our economy in the wake of the financial crisis have made clear communication more important than ever before,” Yellen said in late 2012, just weeks before the Fed took another big step in what Yellen has called a communication revolution at the Fed: using economic indicators as explicit thresholds for monetary policy change.

Look for Yellen to tweak and expand Fed communications, possibly with more news conferences and more detailed forecasts from policymakers. - Reuters


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