Janet Yellen record gives pointer to Fed policy if Obama picks her as chair: FT 29 Sept:


If Janet Yellen gets the top job at the US Federal Reserve she will take over at a time of almost unprecedented influence: the prospects of markets and economies around the globe will be affected by when the Fed chooses to take its foot off the economic accelerator and how much inflation it is willing to risk before doing so.

That makes the monetary policy views of the current vice-chair of overwhelming importance to financial markets and one advantage of Ms Yellen is that she is a 12-year veteran of the rate-setting Federal Open Market Committee. Her record gives a clear idea of the policies she would pursue as chair.
That history shows she is not the simplistic monetary policy “dove” that Wall Street sometimes imagines. Rather it shows one of the Fed’s shrewder analysts of the economy, a fierce defender of its dual mandate on unemployment and inflation, and a consistent advocate for greater transparency and communication.
One of her earliest episodes at the Fed may help explain why there was no taper of asset purchases from $85bn-a-month two weeks ago: Ms Yellen is the only current member of the FOMC who was present for the “bond shock” of 1994, when the Fed doubled rates from 3 per cent to 6 per cent in a campaign of rises.
That November, then Fed chair Alan Greenspan wanted to raise rates by 75 basis points. “I think that we are behind the curve,” he said at the FOMC. “I think that creating a mild surprise would be of significant value.”
But Ms Yellen worried that such an aggressive move could backfire. “I am concerned about the possibility that bond yields could rise more than [we] forecast, which could provoke a stock market reaction,” she said, arguing for a 50-basis-point move instead.
The next month, Orange County in California went bankrupt and Mexico was forced to devalue the peso. By July 1995, the FOMC was cutting rates again, suggesting that Ms Yellen’s call was correct. The experience may caution her against over-aggressive tightening of interest rates.
Ms Yellen left the Fed at the start of 1997, and returned as head of the San Francisco bank in the middle of 2004, so she was present for the years leading up to the financial crisis. The record shows that she was more alert than many to the risks – pondering a housing market bubble as early as July 2005 – but even in January 2007, she did not anticipate a crisis.
Through 2005 and 2006, she fretted about the low savings rate, the puzzle of low long-term bond rates, and rising house prices – in retrospect, all hints of what was happening in the financial system – but the FOMC transcripts do not show her arguing for a sharply different monetary policy as a result.

When the crisis did come, Ms Yellen’s response reflected a thread that runs through her Fed career: conviction that the central bank can and should try to stabilise the real economy – in particular, unemployment – as well as just inflation.
At the time Ms Yellen first joined the Fed, the envy of every central bank was Germany’s long record of stable prices, and there was a move in Congress to set an inflation-only target for the Fed. Ms Yellen was a strong internal opponent of such a change.
In a debate at the February 1995 FOMC, remembered by those there for its civility as well as its quality, she argued that the public did not just care about inflation. “The public also cares about real outcomes,” she said. “Households and businesses very much dislike fluctuations in output and employment, for good reasons.”
When the goals of low unemployment and low inflation conflicted, she said, and there was a tough trade-off, then “to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target”.
During the crisis, that attitude generally led her to argue for earlier and more aggressive rate cuts; in the aftermath, she has pushed for stronger stimulus. Recently, she has shown simulations that suggest “optimal control” of the economy would let inflation rise above 2 per cent in order to bring unemployment down faster, pointing to her likely preferences as Fed chair.
But while Ms Yellen has been a champion of the Fed’s dual mandate, she has also been one of its strongest proponents of greater transparency, including the adoption of an explicit 2 per cent inflation goal in January 2012.
She was already heading that way in 1996, when inflation was around 3 per cent. “I believe that heading toward 2 per cent inflation would be a good idea and that we should do so in a slow fashion, looking at what happens along the way,” she said at the FOMC.
Ms Yellen was there again when the Fed next discussed the issue nine years later, in 2005, and she argued it was time to adopt an explicit goal. Doing so, she said, would make it easier for the public to understand what to expect, help counter inflation and deflation scares, and boost the Fed’s accountability and transparency.
Since becoming vice-chair in 2010 she has chaired an FOMC subcommittee on communications. In addition to the 2 per cent inflation objective, that subcommittee has produced press conferences; calendar date guidance of low rates “at least through mid-2013”; the threshold of low interest rates while unemployment is above 6.5 per cent; and FOMC forecasts of future interest rates.
Before going silent as the race for the Fed chairmanship heated up, her speeches suggested that she was not done yet with enhancing communications – and that offers the single best clue as to how a Yellen Fed would proceed.
“As the time of the first increase in the federal funds rate moves closer, in my view it will be increasingly important for the committee to clearly communicate about how the federal funds rate target will be adjusted,” Ms Yellen said in April.
“I believe further improvements in the FOMC’s communication are possible, and I expect they will continue.”

Reply · Report Post