I reviewed the Yellen speech given at the San Francisco Fed last week. The comments are most recent views of the Chairman and it was focused on an audience of professional economists. There is a lot of content on the surface with a good review of many key issues in monetary economics, but in the end the content was empty if you were looking for "forward guidance" on rate directions. Patience is still the watchword even if it is not used by the FOMC. There is a significant amount of misguidance on what markets should expect. Yellen is not telling us anything wrong. The Chairman is just not providing insight on how action will be taken except that it will be flexible with conditions at any given time. If the purpose of forward guidance is to provide clear concise information on policy. You did not get it.
I can agree with the summary seen in a number of economic blogs.
- Rates will rise some time this year, but maybe not immediately. The SEP forecasts, Fed funds, and forecasters have said this for some time. Nothing new here.
- The rate adjustment will be gradual. We already expect that this could take years and the Fed has no clear idea of how to get rates normalized quickly.
- Policy lags are significant. We do not know what those lengths are in the unconventional world of zero rates. This tells us the no one know what the reaction will be to current or future policy.
- Inflation is going to be a guide for these adjustments. If there is no inflation, there will be no rise in the Fed funds.
- Everything is going to be flexible. The wording is data dependent but the real policy is just discretion.
All this means is that following Fed speeches is a loser's game. Follow the markets through price trends and fundamentals. Have a cocktail with friends and chat about Fed policy but leave the heavy lifting of investment decisions to a clear set of decision rules. The Yellen speech was like a Seinfeld episode - a lot of little stories but ultimately a show about nothing.
No comments:
Post a Comment