Yellen speach on monetary communication

Fed Vice Chairman Yellen provided interesting comments on monetary policy communication. Her argument is that the Fed could have a greater impact if it could provide better communication on its policy intent. In this case, if the Fed communicated that they would hold steady their current easing policy for a longer time period, the market would be able to form better expectations on the inflation and growth.

If the market expects the Fed to stay more accomodative, then the result will be more accomodative. The unemployment rate would decline and core inflation would go up but this would all be good.

The Fed funds rate is suggesting that rates will have a 1/3 chance of rising at the end of the year. The Fed has to make people believe that this will not happen to keep rates low. Of course, for longer rates there is the issue of whether the markets believe there will be higher inflation and have started to force nominal rates higher. What happens if the markets actually believe that the Fed will stay accommodative? The result may not be good.