Monday, April 6, 2015

Janet Yellen Speech: Normalizing Monetary Policy

This new speech in San Francisco by Janet Yellen just shows that it is pointless to expect further meaningful guidance from the Fed regarding what they will do with interest rates. She provides a lot of details on what goes into their thinking, but the bottom line (from her conclusion shown below) is that the Fed itself does not know what they are going to do.



To conclude, let me emphasize that in determining when to initially increase its target range for the federal funds rate and how to adjust it thereafter, the Committee’s decisions will be data dependent, reflecting evolving judgments concerning the implications of incoming information for the economic outlook. We cannot be certain about the underlying strength of the expansion, the maximum level of employment consistent with price stability, or the longer-run level of interest rates consistent with maximum employment. Policy must adjust as our understanding of these factors changes

However, if conditions do evolve in the manner that most of my FOMC colleagues and I anticipate, I would expect the level of the federal funds rate to be normalized only gradually, reflecting the gradual diminution of headwinds from the financial crisis and the balance of risks I have enumerated of moving either too slowly or too quickly. Nothing about the course of the Committee’s actions is predetermined except the Committee’s commitment to promote our dual mandate of maximum employment and price stability.
My added comments:

It is worth the time to read the entire speech because Ms. Yellen does go into some detail about all the risks they have to manage right now and reasons why they might or might not raise interest rates any time soon. The point I took from this speech is that the system is far from being securely stable so the Fed is going to move very cautiously. Also, if they do raise rates, they will not raise them very much for years. That much seems pretty clear.

The latest economic data is coming in weaker than expected. If the Fed is "data dependent", it may be that Jim Rickards will be right and the Fed will not raise rates this year. Expect the uncertainty to add to market volatility.

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