Yellen Slams Lid on This Rising but Wacky Doctrine

Fed Chair Janet Yellen’s speech today on “Inflation Dynamics and Monetary Policy” was long. Including the citation of sources, the appendix, and 35 footnotes, it amounted to nearly 11,000 words (over 11 times as long as this article).

Yet all anyone wanted to hear was confirmation that there would be no rate increase this year, or next year, or ever. You don’t have to give a long speech to explain that.

Those folks were bitterly disappointed when she concluded:

Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.

So there might be some fireworks in the markets. In case it gets too exciting, she left plenty of wiggle room for some last-minute flip-flopping:

But if the economy surprises us, our judgments about appropriate monetary policy will change.

Yet the most interesting thing in the speech was in the footnotes. There has been pressure building around the world – including some voices at the Fed, at the IMF, and other organs – for boosting the target for consumer price inflation to 4%, and then doing whatever it takes to get there, in a scorched-earth campaign to run over consumers, savers, and the lower 90% of wage earners who’re having trouble getting pay increases.

And investors that hold the $40 trillion in US corporate and government bonds would get their heads handed to them.

But the borrowers would make out like bandits. Over-indebted governments and those lucky individuals with pay increases would see their relative debt burden decrease. Corporations would also see their debt burden decrease. And they’d have the added bonus of being able to show that sales are increasing, rather than shrinking, without having to sell one iota more. It would put an end to the dreary revenue recession that afflicts them now.

Whacky ideas such as raising inflation targets to confiscatory levels have a nasty tendency to acquire a life of their own. So it’s good to see Yellen put the kibosh on them. Here she explains, in her very readable 340-word footnote #14, why this won’t work (paragraph breaks and emphasis are mine):

14. Blanchard, Dell’Ariccia and Mauro (2010), among others, have recently suggested that central banks should consider raising their inflation targets, on the grounds that conditions since the financial crisis have demonstrated that monetary policy is more constrained by the effective lower bound (ELB) on nominal interest rates than was originally estimated. Ball (2013), for example, has proposed 4 percent as a more appropriate target for the FOMC.

While it is certainly true that earlier analyses of ELB costs significantly underestimated the likelihood of severe recessions and slow recoveries of the sort recently experienced in the United States and elsewhere (see Chung and others, 2012), it is also the case that these analyses did not take into account central banks’ ability to use large-scale asset purchases and other unconventional tools to mitigate the costs arising from the ELB constraint.

In addition, it is not obvious that a modestly higher target rate of inflation would have greatly increased the Federal Reserve’s ability to support real activity in the special conditions that prevailed in the wake of the financial crisis, when some of the channels through which lower interest rates stimulate aggregate spending, such as housing construction, were probably attenuated.

Beyond these tactical considerations, however, changing the FOMC’s long-run inflation objective would risk calling into question the FOMC’s commitment to stabilizing inflation at any level because it might lead people to suspect that the target could be changed opportunistically in the future.

If so, then the key benefits of stable inflation expectations discussed below–an increased ability of monetary policy to fight economic downturns without sacrificing price stability–might be lost. Moreover, if the purpose of a higher inflation target is to increase the ability of central banks to deal with the severe recessions that follow financial crises, then a better strategic approach might be to rely on more vigorous supervisory and macroprudential policies to reduce the likelihood of such events.

Finally, targeting inflation in the vicinity of 4 percent or higher would stretch the meaning of “stable prices” in the Federal Reserve Act.

Thank you, Janet!

And here she explains in her unusually personal footnote #28 why raising inflation targeting would be a crummy idea, while admitting that the Fed and other central banks might actually not be omnipotent and that it might take “years” to manipulate the public into the scheme (paragraph breaks and emphasis are mine):

28. My interpretation of the historical evidence is that long-run inflation expectations become anchored at a particular level only after a central bank succeeds in keeping actual inflation near some target level for many years. For that reason, I am somewhat skeptical about the actual effectiveness of any monetary policy that relies primarily on the central bank’s theoretical ability to influence the public’s inflation expectations directly by simply announcing that it will pursue a different inflation goal in the future.

Although such announcements might potentially persuade some financial market participants and professional forecasters to shift their expectations, other members of the public are probably much less likely to do so.

Hence, actual inflation would probably be affected only after the central bank has had sufficient time to concretely demonstrate its sustained commitment and ability to generate a new norm for the average level of inflation and the behavior of monetary policy–a process that might take years, based on U.S. experience.

Consistent with my assessment that announcements alone are not enough, Bernanke and others (1999) found no evidence across a number of countries that the initial disinflation which follows the adoption of inflation targeting is any less costly than disinflations carried out under alternative monetary regimes.

And bond investors are already getting nervous. Read… The US Bond Market is far Larger than the Stock Market: If Even Part of it Blows, it’ll Dig a Magnificent Crater

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  20 comments for “Yellen Slams Lid on This Rising but Wacky Doctrine

  1. Michael says:

    Janet Yellen or any members of the FED have no credibility. Her notes are overly complex which is a clear sign of obfuscation. Their intent is clear by their actions not words. The good news is she can bare the responsibility for the problems that result from her hubris.

    • Vespa P200E says:

      Old Yeller Yellen is showing her true colors – clueless and reactive at her handler’ banksters whim.

      She hasn’t quite mastered the art of obfuscating language of her predecessors just yet though she is trying. Well be careful what you wish for Janet as Benny left you a real mess and he bailed right before the excrements hit the fan and you will go down in history as deer in headlight incompetent Fed chair.

  2. Julian the Apostate says:

    Well, well…even a broken clock is right twice a day.

  3. unit472 says:

    Its not clear to me that a Central Bank can control inflation/deflationary forces to any specific target level anyway. The BoJ and, more recently the ECB and Fed have tried to boost inflation towards their 2% target with little apparent success and those who recall the late 1970’s the difficulty that was had trying to wring inflation out of the economy back then.

    Ambrose Evans Pritchard has an interesting column out today on the possibility that population demographics might do what Central Banks have not managed and that is boost real wages and thus real demand and lending activity. The basic thesis is that IF labor forces shrink faster through aging faster than automation can eliminate jobs business will have no choice but pay labor more.
    We shall see who wins this race but it again lies outside the ability of monetary policy to affect!

    • Gil Obrero says:

      unfortunately AEP is a shill writing mostly drivel that fits his masters meme, and his arrant rubbish can be safely allocated to the garbage bin.

      The major problem with his ridiculous thesis is that robots do no pay taxes, and it will be taxes required that will be needed o pay the debts and the ever increasing burden of elderly.

      As in Japan people will stop having children even more and population will first grow extremely old, then shrink, and after shrinking enough the ones left will end up dying in large part through starvation and poverty, and only when the rump of the population is left, the fittest, will it start to grow again.

      See Darwin,, he understands it even better than me.

    • Vespa P200E says:

      Challenge facing CB cabals of the world are in addition monetary policies and interest rate manipulations under their all mighty control they are also confronted with currency fiascos outside their immediate control.

      I think what the markets may not be discounting is currency devaluations as swimming out of poor economy via exporting its way out resulting in currency wars and debasement of currency by global CB cabals leading to trade wars/embargoes and resulting in real wars. Oh wait – this happened in the 1930’s including oil embargo against Japan and prelude to WWII…

  4. interesting says:

    “for boosting the target for consumer price inflation to 4%”

    facepalm, their target is 2% which feels more like 10% to me so 4% will feel more like 20%, meanwhile my income increases since 1997 have been 0%

    please, someone make the insanity stop!!!!

  5. VegasBob says:

    The wealthy are basically unaffected by inflation because they own most of the wealth anyway.

    The world economy is drowning in debt, and in many countries debt repayment has become an impossible financial burden. When debt service consumes too great a percentage of income, current consumption and GDP suffer.

    The problem is that the only ways out of a debt trap are inflation or default. Default would cost the wealthy dearly. Accordingly, massive defaults have been prevented so far by bailouts, guarantees, zero interest rates and money-printing. And of course, inflation is preferable to default, since the wealthy generally do not suffer under high inflation.

    The real reason for zero interest rates and rampant money-printing is to keep the wealth in the hands of the wealthy and protect them from losses on their bad investments.

    • hidflect says:

      Not to mention that the wealthy get their hands on the money first. They spend it and THEN it becomes inflationary.

  6. B.S. says:

    Sorry, that is just more BS by Yellen and the FED.

    Substitute 2% (or 1%, or ANYTHING) in her writings and you see how little sense that means.

    I refer you to the 5/24/15 article by David Stockman:

    “Every part of that proposition is dead wrong. To wit, free money does immense harm by fueling rampant carry trade speculation; there is zero evidence that 2% inflation results in any more growth than 1% or even 0% inflation; and, as an empirical matter, there is plenty of inflation in the US economy and has been during the entire past 15 years of rampant money printing designed to stimulate more growth.”

    The FED logic is wrong, and any pronouncements attempting to justify their course of action since the mid 90’s is invalid and misleading.

    Central planning can not work for the majority populace in any economy, and only works to enrich the upper 10% elite.

  7. rich black says:

    Want to boost inflation? Then give everyone a guaranteed income, whether they are working or not. Want to juice the economy? Then subsidize mortgage rates, down to 2%, and create 40 year mortgages. I’m not advocating for any of this, I’m just saying that the Fed and the US Gov do have the power to goose the economy.

    • d says:

      With the price of houses related to salary’s 40 years is not enough. Try multi generational or repayment after both partners are deceased by auction if the next generation does not whish to take over the property.

      Japan has these, They work, they are not a good deal when you view the interest paid by three generations but they work, and keep family’s on lower incomes, in ridiculously priced houses.

    • Vespa P200E says:

      Tenets of keynesian wetdream sprinkled with socialism but hey socilaism is OK till they run out of OPM (other people’s money).

      Oh BTW – definition os STAGFLATION is poor economy with inflation – worst of the worst with pitchforks by the common folks – politicians’ nightmare everywhere…

  8. Spencer says:

    Full audit needed, regulators found wanting and complicit, enablers to the crimes, and FMOC operators all jailed into the most populated prison in the USA.


  9. ERG says:

    There is no need to change the criteria the Fed uses because they do whatever they want no matter what.

    A rate increase is still on the table? Really? Someone please tell me WHAT set of economic conditions are going to change (i.e., improve) between now and the next two POMC meetings that will make that a reality? The Fed is full of s**t!

    They are stuck between not being able to admit their policies have been a failure (like one of their OWN reports recently concluded!) and triggering the next downturn will all this BS talk of raising rates. That talk is what tipped China over and had them put a “For Sale” sign on their US treasuries.

    What they want to do now is go back to QE (they will find another name for it) and place the blame for it on someone/thing other than themselves.

    Bottom line: We’ll have some form of QE implemented before we will ever have an interest rate increase.

  10. Peterb says:

    The U.S. $ is gaining and this alone is bad news for the future economic growth, so adding an incentive to attract capital to the US$ is not going to fly. The U.S. is still weak, but stronger than most others, rates need to stay low until this trend stops.

  11. NY Geezer says:

    The Yellen notes reveal that the Bullard faction are extremely aggressive supporters within the Fed of the .000001%’s view that they should have an unrestrained libertarian right to exploit this economy for their own profit and that the collateral damage to others is of no concern.

    The FOMC is not a college of economists who manage this economy impartially in the best interest of the nation. It is not a college of academics who apply economic principles without regard to politics to serve only the national interest.

    Rather, it consists of factions that represent the interests of differing elite business groups, and each faction merely harnesses its favorite economic theories to promote the interests they represent.

    In my view, Bullard’s decision to promote his contrary view publicly is an attempt to undermine the Yellen faction and her leadership for the benefit of his interests as well as the economic interests he represents. He has offered no rational basis upon which to support the claim that the US economy will now or in the future benefit from higher interest rates.

  12. Alistair McLaughlin says:

    “…then a better strategic approach might be to rely on more vigorous supervisory and macroprudential policies to reduce the likelihood of such events.”

    This statement strikes me as being incredibly naïve. She’s obviously drunk the Greenspan-Bernanke Kool-Aid regarding the omnipotence of central bankers, and their ability to steer the economy clear of recessions.

    Much of the mess we’re in today can be attributed directly to Greenspan’s reckless use of monetary policy to try to prevent slowdowns and negate the business cycle. It did not and does not work. As we’ve seen, it merely allowed the various stressors in the economy to build up further before finally blowing. In fact, I would go so far as to say we need regular slowdowns – if not outright recessions – to prevent bubbles and capital misallocations from becoming too large and disruptive.

  13. Yellen = nonsense.

    Neither central banks nor finance are able to increase purchasing power … against which money/credit is nothing other than a symbolic, derivative claim.

    Purchasing power is always equivalent to capital available for purchase, capital being non-renewable resources and ordinary resources that are over-exploited to the degree that they become non-renewable equivalents. Capital becomes unavailable as it is depleted, along with it is purchasing power; eventually there is none … Regardless of how much ‘money’ or ‘assets’ exist within an economy, the money and assets are worthless, empty claims against purchasing power that no longer exists.

    Whatever central bankers do is irrelevant. They cannot create capital only multiplying claims. The only effect these claims can have is to enable a more-rapid annihilation of the pittance of capital that remains to us and our descendants.

  14. Peeon says:

    Thank you Wolf for pulling that out of the 11 page speech and clarifying it. I’d bet it’s not exactly generous to most of the population, but I guess they are starting to think about reining the beast a little before they *all* get their heads handed to them in one way or another. Or their physical assets vandalized and burned.

    I have no training in markets or their lingo, but my English comp is pretty good, and the mildly sarcastic footnotes are almost funny for their straight faced insinuations. Thanks for some good articles which translate a lot of information to plain English.

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