Yellen Wisely Keeps the Fed on a Steady Course
There was much speculation that Federal Reserve Chair Janet Yellen would use her speech to central bankers and economists gathered at Jackson Hole, Wyoming, on Friday to announce a major policy initiative. Some even suggested that she might add to growing talk about an expansion of the Fed's tool kit, along with a change in objectives.
Instead, she made no major announcements and produced no major surprises. Yellen limited her remarks to familiar issues. She noted improvements in the economic situation, particularly “the continued solid performance of the labor market and outlook for economic activity and inflation,” which strengthen the case for a Fed rate hike. She reiterated that what the Fed will end up doing remains data dependent. And she signaled that its existing tool kit continues to be appropriate.
There are four good reasons for Yellen to remain cautious and measured.
- Inclination: While her predecessor, Ben Bernanke, used Jackson Hole to signal major policy initiatives, including the pivot to a second round of quantitative easing in 2010, Yellen has tended to play down the gathering. She is not the first Fed chair to do so: Alan Greenspan was inclined to take a similar approach and Mario Draghi, the president of the European Central Bank, decided not to attend the symposium.
- Ability: Given the recent protracted period of unbalanced policy stances that have relied excessively on unconventional monetary measures, there seems to be a growing consensus, both within the Fed and outside, that central banks are less able to deliver macroeconomic outcomes. Because of the structural headwinds facing the U.S. economy, expanding the Fed’s tool box is less important than the need to convince other government agencies to step up to their policy responsibilities. That includes adopting pro-growth structural reforms and a more balanced demand management policy stance, including increased infrastructure investment.
- International environment: Because the U.S. economy has been a relative out-performer in the advanced world, the Fed has been able to observe the experience of some of its peers that have ventured even deeper into unconventional policies -- including via negative policy rates and by specifying a broader set of market products for their large-scale asset purchases. This is particularly the case of the Bank of Japan, which has combined negative nominal rates with equity purchases. And the result is less than encouraging so far, highlighting not just the limited benefits of such approaches, but also the notable risk of collateral damage and unintended consequences. All of which puts the credibility of central banks at risk.
- Political risks: Some proposals for changes to the Fed’s approach have important political dimensions. This is especially true of those involving a higher inflation target, as San Francisco Fed President John Williams suggested last week. But given the risk that it could lose some of its autonomy, the Fed should be very wary of becoming a political football in Congress.
In sum, Yellen did the right thing. And rather than expect her to do more in the future, those who care about the well-being of the global economy should be working a lot harder to shift the spotlight away from central banks and toward other government agencies. Without such a shift, advanced economies will continue to struggle to promote higher inclusive growth, contain inequality and encourage genuine financial stability.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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