Of Course Yellen Brought The Sugar

I don’t know what idiots started the rumors that Yellen was a hawk, but they should have their reputations destroyed on live television. I can’t think of a single moment when Yellen skewed hawkish in Fed minutes or anywhere else in the body of her work over the last 5 years.

Consider this speech titled Perspectives On Monetary Policy she delivered last June to the Boston Economic Club.

She starts off:

Economic Conditions and the Outlook

In my remarks tonight, I will describe my perspective on monetary policy. To begin, however, I’ll highlight some of the current conditions and key features of the economic outlook that shape my views. To anticipate the main points, the economy appears to be expanding at a moderate pace. The unemployment rate is almost 1 percentage point lower than it was a year ago, but we are still far from full employment. Looking ahead, I anticipate that significant headwinds will continue to restrain the pace of the recovery so that the remaining employment gap is likely to close only slowly. At the same time, inflation (abstracting from the transitory effects of movements in oil prices) has been running near 2 percent over the past two years, and I expect it to remain at or below the Federal Open Market Committee’s (the FOMC’s) 2 percent objective for the foreseeable future. As always, considerable uncertainty attends the outlook for both growth and inflation; events could prove either more positive or negative than what I see as the most likely outcome. That said, as I will explain, I consider the balance of risks to be tilted toward a weaker economy.

She then goes on for some time, eventually remarking on the tools the Fed has been using to try and correct the sluggish economic recovery:

The Conduct of Policy with Unconventional Tools

Now turning to monetary policy, I will begin by discussing the FOMC’s reliance on unconventional tools to address the disappointing pace of recovery. I will then elaborate my rationale for supporting a highly accommodative policy stance.

As you know, since late 2008, the FOMC’s standard policy tool, the target federal funds rate, has been maintained at the zero lower bound. To provide further accommodation, we have employed two unconventional tools to support the recovery–extended forward guidance about the future path of the federal funds rate, and large-scale asset purchases and other balance sheet actions that have greatly increased the size and duration of the Federal Reserve’s portfolio.

Yellen then launches into a long explanation of the rationale for “Highly Accomodative Policy”, describing the statistical indicators and rules based decision making she likes to use to determine how accomodative policy should be extended. Finally, she wraps up her speech as such:

…On the one hand, our unconventional tools have some limitations and costs. For example, the effects of forward guidance are likely to be weaker the longer the horizon of the guidance, implying that it may be difficult to provide much more stimulus through this channel. As for our balance sheet operations, although we have now acquired some experience with this tool, there is still considerable uncertainty about its likely economic effects. Moreover, some have expressed concern that a substantial further expansion of the balance sheet could interfere with the Fed’s ability to execute a smooth exit from its accommodative policies at the appropriate time. I disagree with this view: The FOMC has tested a variety of tools to ensure that we will be able to raise short-term interest rates when needed while gradually returning the portfolio to a more normal size and composition. But even if unjustified, such concerns could in theory reduce confidence in the Federal Reserve and so lead to an undesired increase in inflation expectations.

On the other hand, risk management considerations arising from today’s unusual circumstances strengthen the case for additional accommodation beyond that called for by simple policy rules and optimal control under the modal outlook. In particular, as I have noted, there are a number of significant downside risks to the economic outlook, and hence it may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest.

Conclusion
In my remarks this evening I have sought to explain why, in my view, a highly accommodative monetary policy will remain appropriate for some time to come. My views concerning the stance of monetary policy reflect the FOMC’s firm commitment to the goals of maximum employment and stable prices, my appraisal of the medium term outlook (which is importantly shaped by the persistent legacy of the housing bust and ensuing financial crisis), and by my assessment of the balance of risks facing the economy. Of course, as I’ve emphasized, the outlook is uncertain and the Committee will need to adjust policy as appropriate as actual conditions unfold. For this reason, the FOMC’s forward guidance is explicitly conditioned on its anticipation of “low rates of resource utilization and a subdued outlook for inflation over the medium run.”23 If the recovery were to proceed faster than expected or if inflation pressures were to pick up materially, the FOMC could adjust policy by bringing forward the expected date of tightening. In contrast, if the Committee judges that the recovery is proceeding at an insufficient pace, we could undertake portfolio actions such as additional asset purchases or a further maturity extension program. It is for this reason that the FOMC emphasized, in its statement following the April meeting, that it would “regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”

Her “one hand” of comment seems to be the closest she comes, throughout the entire length of this speech, to suggesting that there could be drawbacks to “Highly Accomodative Policy”. That’s it; more of a formality than anything. Hell, she immediately says she disagrees with that point of view. The entire content of the speech was “we can do more.”

Yellen has consistently been on the record stating, “we can do more.”

Yellen has pushed for “we can do more.”

This was only a year ago. The recovery hasn’t dramatically improved since then. And this speech is just one example of Yellen being on the record dismissing concerns that Fed policy might become a double edged sword.

Yellen strikes me as the kind of Fed head that will be prone to taking Fed policy too far, into the danger zones of monetary interventionism, if anything. She believes in the notion that the Fed can actively micro-manage accomodative policy, with limited trade offs. While she is very much aware of the long term unpredictability of monetary policy tools, she is dismissive of the concerns.

And yesterday, Yellen was so kind to remind the people labelling her a hawk that they don’t know what they’re talking about. Those comments had no support from any observable Yellen comments or actions.

Appropriately, I really don’t think any taper is coming at any point over the next several years. Or, under Yellen’s discretion, any Fed actions, when taken in aggregate, will skew net dovish, with new programs more than overcompensating any individual restraining or contractionary policy move.

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