Tuesday, June 21, 2016

Yellen’s 6/21/2016 Testimony Before Senate Banking Committee

Yellen’s 6/21/2016 Testimony

Before Senate Banking Committee

Fed Chair Janet Yellen is testifying before one of the Fed oversight committees today, the Senate Banking Committee. One question has been which Janet Yellen would appear. It looks like we got maňana Janet, the more dovish one.

Same old same old…
The Fed’s June meeting issued a policy statement that sounded like the one that came before it. The Fed released a number of economic projections made by committee members that continued to erode the outlook for growth and that kept the inflation ‘forecasts’ below their policy objective.  

And, SURPRISE (!) at the same Fed meeting
The surprise at the June meeting of just days ago was the tone in the Fed Chair’s post-meeting press conference and the new SEPs by individual committee members about their constrained forecasts for the path of the Fed funds rate in years ahead.  Yellen’s tone and comments in the Q&A were much more dovish that the past official policy statements have been and the ‘presser’ was fully in sympathy with the new much lower path for Fed funds that individual members laid out. Today’s testimony is very much in that same spirit.

Much less reliance on forward guidance…REALLY??!!
Somewhat paradoxically in her testimony today Yellen has said that the Fed is relying much less on forward guidance than it did in the past and she has distanced the Fed further from these estimates.

This seems WRONG. After all it was the SEP interest rate forecasts that moved markets not the June policy statement and it was Yellen’s tone at the press conference.  

SEP Fed funds rates are not coordinated
It is true that the FOMC member outlooks are prepared before the FOMC meets and do not reflect and stamp of approval from the committee itself. Each forecast relies on each member’s own assessments so each one is actually based on a different forecast and a personal view for the economy. In some sense pooling them together is like adding up apples and oranges. But, of course, we do this all the time by comparing various private sectors forecasts- the blue chip is one well known such example.

Fed swears off cake…
It seems to me that if most Fed members think in isolation that the rate path for Fed funds is now lower if we were to pool them together and force a consensus we would get the same result.  The Fed here seems to want to have its cake and eat it too or rather to deny that it has any ownership of this cake and asserts that it has no intent to take even a bite. 

So why are these scenarios presented to us?

I have no problem with the Fed denial that the midpoint or average or any summary statistic from these Fed funds projections represents an official outlook by the Fed. But denying that there is any forward guidance here seems a bit Pollyannaish.   Clearly, there is forward guidance here.

Long standing Fed criticism:
Let me repeat a criticism I have often lodged about the Fed. It has no inflation commitment. It says that the economy operates better with inflation at 2% but is has no commitment to hit a 2% target over any time horizon. It has a mandate for full employment but it has no precise definition of full employment or any promise to make that happen in any technical way (no target for nonfarm jobs growth or for the unemployment rate). The Fed’s treatment of its SEP Fed funds rate is in this spirit. While there is no specific number promised for unemployment and no specific horizon to hit a 2% inflation rate the Fed has some very specific numbers laid out for future Fed funds rates but it wants them to have NO OFFICIAL standing at all.  

The Fed: an attitude for latitude
All of this gives the Fed a great deal of latitude to make policy and I think goes a long way to explain why Fed communication so often goes off track. Moreover, since policy is made by committee it serves the Fed’s need to forge a policy consensus to have as vague a policy commitment as possible.

Cautious Yellen
In Yellen’s remarks today we see a lot of the cautious Janet Yellen from the post FOMC meeting press conference. When pressed under questioning she talked about headwinds as being the reason that the Fed funds rate is so far below the Taylor Rule rate that otherwise might prevail. However, when pressed about the prospect of recession by year-end she asserted that such a risk was quite low.

Still: Fed under pressure
In separate harangues Yellen has been pressured over the five banks that have failed the ‘living will’ mandate. There is also concern about ongoing banking sector consolidation and about the regulatory impact on small banks. In addition the Fed was criticized on grounds of having poor diversity. There are women in high positions at the Fed but no people of color. Elizabeth Warren wants Congress to take a hard look at the regional bank president selection process in order to get more diversity.


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