Can Janet Yellen Be Serious?
Let the games begin.
Sometimes you have to wonder if the Federal Reserve's governors are just laughing at the analysts who pore over every statement to find crucial hidden meanings in their blandest phrases. If they aren't laughing, they should be.
For days before the publication of this afternoon's Federal Open Market Committee statement, discussion had centered on the phrase "considerable time." What did the FOMC mean when it previously said that it would hold short-term interest rates close to zero for a "considerable time"? Would that pivotal phrase be removed from the December statement? If it were, what would its absence mean?
In something of a conceptual if not linguistic breakthrough, the Fed both dropped the phrase and retained it. The new language says that the Fed "can be patient in beginning to normalize the stance of monetary policy." On the other hand, it pointed out that this new formula is "consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October."
Splendid. Analysts can now spend the holiday season debating whether the Fed will merely be patient or will be patient for a considerable time, or some combination thereof; how long a "considerable time" is, exactly (at least that's a comfortingly familiar question); what it means, monetarily if not spiritually, to be "patient"; and indeed, whether the change in language signifies anything at all.
Does anyone else think this is all a bit -- what's the right word -- excessive? Here's a more plausible theory: The change in language signifies nothing. That does raise the question of why the Fed changed it anyway.
Chairman Janet Yellen actually addressed this point when she spoke to the media after the statement had been released. Fed policy hadn't changed, she affirmed. But the language had. Why? Because the FOMC wanted to remove the link between the Fed's words and the end of its policy of quantitative easing -- which happened in October. This makes sense.
But then she said, most unwisely, that "patient" should be taken to mean that the Fed didn't expect to announce higher interest rates at the next two meetings. Analysts can now obsess over what that means. Will the two be changed to one or three in subsequent statements, modified in some other way, or simply dropped? Adding a wrinkle to that completely pointless discussion, Yellen said that interest-rate decisions don't need to be confined to meetings followed by pre-scheduled news conferences. One wonders what she meant by that.
Here's the point, and it's really quite simple: The Fed doesn't know when it will start to raise interest rates, nor should it have to know, nor should it indulge analysts' misconceived determination to find out. Interest-rate changes are not, and should not be, on a schedule. They depend entirely on what happens in the economy, and the Fed -- like every last one of those analysts -- doesn't know what will happen. What it can and should do is draw attention to the economic indicators it is following -- in particular, indications of inflation pressure in the labor market. The rest just sows confusion.
For some reason, the Fed refuses to learn this lesson. Over time, supposedly in pursuit of clarity, Fed statements have grown ever longer and more complicated. The new statement follows the familiar pattern of seeking to clarify by means of introducing fresh complications and debating points.
The whole purpose of a phrase like "considerable time" is that it's meaningless. Embrace that, Janet. In future, for the sake of clarity, keep it short and respond to all questions with, "We'll get back to you when we know."
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