A brief note on the Fed’s monetary policy

Editor’s note: In light of the battle to succeed Ben Bernanke as Fed Chair, we have decided to make this subscriber post available outside the paywall.

I mentioned Fed Vice Chair Janet Yellen’s speech in the last post. I tend to like the way she phrases things because her statements are the clearest of all of the major FOMC policy makers. This speech is in that vein. If I could summarize her speech, I would say: “The Fed will focus on employment over inflation as far as its dual mandate is concerned until inflation is over 2.5% or unemployment is below 6.5%.”

Now, there was a lot to unpack in her speech about risks to easy money and about how the Fed decides whether the employment market is sluggish. But the bottom line here is that she is fully behind the agreed upon targets that the Fed has communicated as triggers for it to switch policy and she expects the Fed to continue present policy until those targets are reached.

It is not clear if even Bernanke is as unwavering in his support of present policy because his latest performance in front of Congress was more equivocal. Other Fed governors have also made it seem like the Fed could alter policy before either of these goals is met. However, Yellen wants the Fed to stay on course and on message. At the same time, she makes explicit reference to private markets reaching for yield and claims that “there are some signs that investors are reaching for yield”. I see that as a remarkable admission, much more candid than Bernanke was this past week.

But Yellen wants to stay the course because she does “not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability.”

What Yellen says is important because Bernanke will be out before the next Presidential election and Yellen may well be the frontrunner for Obama’s nomination to Bernanke’s seat. I suggest we listen to What Janet Yellen has to say whether we agree or not.