Tag Archives: Janet Yellen

Latest from the Fed

Some have been questioning projections made by Janet Yellen on whether or not rates will actually rise in 2015. Apparently, her last speech left investors questioning when the central bank plans to raise short-term interest rates. The Fed is still on track to reduce their monthly bond buying to $45 billion at their meeting this month, but some investors still feel that Yellen gave her audience a vague projection last month.

At the Economic Club of New York last week, Yellen commented, “While monetary-policy discussions naturally begin with a baseline outlook, the path of the economy is uncertain, and effective policy must respond to significant unexpected twists and turns the economy may take”. The vagueness of this statement has left many confused, given that the Fed usually tries to provide concrete information about the outlook of short-term interest rates.

However, now that she has switched to a more mysterious approach, this seems to suggest that slow economic growth, low inflation, and poor measures of unemployment are beginning to slip back into the picture. This contrasts with her statement last month that the Fed may wait six months after the bond-buying ends before raising rates. In regard to the trading markets, investors have reacted relatively calm to the news. Yields on 10-year Treasury notes have remained between 2.5 and 3%. A possible reason that they haven’t moved is because the Fed hasn’t announced any bad news- just somewhat neutral news. As long as a definite position isn’t taken, I don’t think that we should anticipate too much movement.

Another piece of the puzzle related to productivity level- “U.S. output-per-hour worked, a standard measure of productivity, grew just 0.5% in 2013 and appeared to grow slowly again in the first quarter”. The bad thing about slow productivity is that it makes it harder to calculate the amount of slack in the economy level. Slack is a key part of measuring uncertainty, and without the ability to measure of uncertainty it is clearly more difficult to predict the right time to raise interest rates.

In my opinion, I don’t think there’s anything wrong with the projections that Janet Yellen has given. Many keep pressing her to give a concrete date of when to expect rates to rise, but at the end of the day there really are too many factors that control the outcome. Ms. Yellen is not clairvoyant, she’s really doing the best that she can as far as looking into the specific elements that may cause rates to change. We can see this through her decision to drop the unemployment rate target because she believed there were many other forces at hand. In sum, I believe that those doubting Ms. Yellen should sit back and realize that if she were to give a concrete date and then unforeseeable measures caused her to re-adjust her position, the public would be even more displeased. Naysayers need to realize that we have slowly been inching our way out of the recession, the future still looks promising.

Yellen at the Economic Club of NY

In Janet Yellen’s speech to the Economic Club of New York on Wednesday, she assured investors that low interest rates would continue and also focused on low inflation and economic slack. This was a follow-up to her meeting in March that left investors with the impression that interest rates would rise in the near future.

During the speech, Ms. Yellen made sure to point out that the economy is an uncertain place, and the Fed cannot lose sight of this as they propose monetary policy. However, she did give a more concrete prediction of when she expects to rise rates. She intends to keep interest rates low until at least the middle of 2015, given that the economic outlook allows the US to maintain low interest rates.

Another main point that Yellen stressed was the inflation rate target. She said that she was more worried about inflation becoming too low rather than too high. Later she added that the Fed’s focus should be on lifting inflation to the 2% target, not holding it down. During the speech, she commented, “The Fed is “well aware” that inflation could shoot above its 2% goal, she said. ‘At present, I rate the chances of this happening as significantly below the chances of inflation persisting below 2%.’” Low inflation is a problem because it signals weak economic demand. Also, not leaving a large enough inflation threshold can lead to deflationary problems in the future. Deflation is detrimental to the economy because it leads to many painful outcomes- the combination of falling prices, consumers’ reduced likelihood of spending, and falling wages depresses the economy and sets it into a deflationary trap. This triggers a vicious circle because rising debt leads to less spending, which leads to further deflation… and repeat.

The problem comes into play when the Fed tries to dictate certain economic issues like long-term unemployment and income inequality. The Fed mentioned that it would like to see wage inflation because this would indicate that slack in the labor market is starting to disappear. Hence, they don’t want discouraged workers to get dropped out of the labor force permanently. Decreasing slack in the labor market will later get job creation back on track. However, the problem is that it’s hard for the central bank to influence these policies. At the end of the day, the central bank is chartered by congress as an independent agency within the government- not to be a policymaker itself. I think that in terms of the trade off between inflation and unemployment, the Fed has more control on the economy through dictating stable inflationary levels. As we have already seen, the Fed has abandoned the unemployment target because there are too broad of measures included that make up this target- many of which the Fed can only indirectly control, if at all. Although the two issues are interrelated- short-term unemployment is relevant for inflation, I believe that the Fed would get the most out of rising inflation back to the 2% target.

(Revised) Fed Drops Unemployment Target

The Fed is still staying on course with the bond buying program. However, some changes have been made to expand the array of indicators used to start raising short-term interest rates, rather than solely focusing on the unemployment rate. Also, Yellen reported at the meeting that the Fed will keep short-term rates lower than usual even after the unemployment and inflation rates return to long-term levels.

In regard to the unemployment rate, the Fed has now decided to drop the connection that it once made to raising the interest rate once the economy has reached the 6.5% unemployment threshold. The Fed plans to use other measures that it believes will represent the situation more accurately, such as the U6 measure (includes marginally attached workers and those working part time but prefer full time work), the share of workers who have been unemployed for six months or more, the rate at which people are quitting jobs, and the share of adults who are holding or seeking jobs.

In terms of interest rates, the Fed plans to keep the short-term rate lower than usual even after the jobless rate and inflation rate return to long term levels. Since the Fed expects a 4% rate as the normal long-run rate, this implies that officials do not expect rates to get back to this level anytime soon. Later actions taken by the Fed were to continue in reduce its bond-buying program to $55 billion. The long-term goal of the program is to hold down long-term interest rates, thus boosting spending, hiring, and growth.

One discrepancy that I noticed in the report was that even though the Fed said it plans to keep rates low well after the Fed returns to the long-run trend, the projections of the actual officials seemed a bit aggressive. More specifically, “Ten of 16 officials saw short-term rates rising to 1% or more by the end of 2015, with four of them right at 1%. Six officials saw rates below 1% by the end of 2015. In December, ten officials saw rates below 1% by the end of 2015. Twelve of 16 officials saw the target fed funds rate rising to 2% or above by the end of 2016, while four officials saw rates staying below 2% by the end of 2016.” In my opinion, I found the projections of these officials in comparison with Yellen’s earlier statements to be contradicting. From Yellen’s report, it seems that the Fed thinks the economy isn’t good enough right now, but will accelerate in the next 12 months- therefore warranting higher interest rates… but the Fed said that it plans to keep rates low “for a considerable time” after the bond buying program ends, given that the program is scheduled to end this fall. However, I anticipate this vagueness has to do with the fact that it depends on the condition of the labor market later this fall. If there were still high unemployment in the labor market and the inflation rate were still running below 2%, this would be good reason to believe that the Fed would hold the interest rate near current levels.

In recent news, the Fed’s minutes released three weeks after the March 18-19 meeting resolved the discrepancy that I addressed in the above paragraph. Reserve officials were concerned at the March meeting that they might have accidentally communicated to the public that they plan to raise interest rates in the near future. While referencing graphs of the Fed officials’ projections, some commented that “this component of the projections could be misconstrued as indicating a move by the committee to a less accommodative reaction function”. In other words, the Fed officials were concerned that a rise in interest rate would lead to a less stimulated economy during a time where exactly the opposite is needed in order to fully recover from the recent recession. “The minutes underscore that Fed officials had not become more impatient to raise rates, a message Ms. Yellen and other members of the Fed’s policy committee have reinforced in public remarks since the meeting.” The Fed’s minutes were well-received. After they were released, many investors experienced stock gains and bond prices increased as well. The minutes also showed that Ms. Yellen had an extra meeting on March 4th to discuss whether and how the Fed should alter the tapering. Meetings like these are unusual, compared to those of her predecessor, Ben Bernanke. Bernanke only held meetings like these during the financial crisis. However, holding meetings like these while not in a recession is beneficial because it shows great leadership and prudence. It proves that Janet Yellen is committed to translating the directions of the Fed very clearly to the public.

Pros and cons in Larbor Market’s update for March

The labor market has its track on a gradual improvement. According to the Labor Department’s address yesterday, nonfarm payrolls rose a seasonally adjusted 192,000 in March and figures for the prior two months were revised up by a combined 37,000, and the unemployment rate stays at 6.7%. Even though many expected strongly a sharp upward trend in labor market early this year, the sheer number of new-added payrolls were not performed as so.

Ever since the recession start from 2008, the job supply was struck down to a low point where over 8.8 million positions were lost during the crisis. It is said that the private part jobs hit a level that surpass the apex before recession, while the government positions still remain well below the peak.

The moderate growth in jobs addressed by Fed chairwoman Janet Yellen as a cause for pausing the plan of raising interest rate. She seems to worry that those signs of softness in labor market imply the economy is still on its way toward positive. Her points suggest that the figure of unemployment rate cannot work as a mere criteria to evaluate market’s health.

Besides that, we already knew that there is a big reason behind the declination of unemployment rate, which is more and more jobless people are giving up on seeking new positions. Those people’s quit shrank the denominator and narrowed the unemployment rate. According to CNN, 347,000 people dropped out of the workforce last December and drag down the participation rate for men alone matched a record low dating back to 1948. If add up the share for women, the number still weaker than is was in 1978.

This March, only 63.2% of Americans 16 or older are participating in the labor force, a number even higher than past months. In fact, the participation rate has been declining since the year 2000, but the 2008 recession accelerate this progress. There is a substantial question raised after all this: Where Have All the Workers Gone?

One possible explanation given in this article in WSJ is that the expansionary monetary policy raises the risk of inflation and shrinks the paycheck, thus subdues their inspiration of job seeking activities. This could be the reason for those who earn few from hourly work but may be irrelevant for those who get high paid. However, I think people who quit pursuing a job must earn their lives somewhere else, in this case, I think investment in stock market could be the new source of income for them. The rumor about minimum wage policy could also play a role in this. Millions of American are working part-time. Those jobs could be affected severely by a bit raising in minimum wage. But mostly, I think the long-last softness in labor market caused more people to lost faith and choose to quit.

It’s been a long way to go before reaching the normal economy level and get unemployment rate back to its healthy situation. However, the participation problem is becoming severely and required for more attention.

Janet Yellen’s labor market indicators

The Fed Chairwoman, Yellen eased the financial markets’ concern that the Fed might raise interest rates sooner than expected. She explained how she evaluated the current economic situation, especially quite confusing labor market condition, and she made it clear that economy still is far below natural level of unemployment. Yellen’s comment contributed to rise of the stock prices. The Dow Jones Industrial Average gained 135 points, or 0.8%, to 16458. The S&P 500 index added 15 points, or 0.8%, to 1872.

Wall Street Journal reported five statistics, which Yellen used to explain that the current labor market still has quite a substantial slack. These are existence of large part time worker, low job turnover rate, modest wage growth, increase of long-term unemployment, and lower job market participation rate. These all explain why unemployment rate can be misleading in interpreting labor market condition.

Among those indicators, the most interesting evidence is the decrease of job market participation rate. Job market participation rate decreased from 66% to 63% during the Great Recession and kept decreasing during the recovery process too. So, even though unemployment rate decreased, that’s partly because some people give up searching for jobs any more. Another interesting interpretation is the decreasing job turnover rate. As people fear successfully getting new jobs, they less quit current jobs. This results in decrease of job turnover rate representing bad condition of labor markets.

There are some people even in the Fed, who argue that the Fed should tighten as soon as possible to prevent adverse effects of easy monetary policy. But I think hasty tightening of monetary policy could cause more harm than good. So, as the Fed begin to taper its bond buying program, I somewhat worried that early tightening may hurt economic recovery. But I feel more relieved that Yellen has strong determination to boost the economy further. Once the economy shows signs of being overstimulated, the Fed has enough power to cool down the economy effectively.

One other interesting thing about Yellen’s speech is that she explained the current economic situation by talking about three ordinary Americans, who had struggled to find jobs. She approached this economic problem easy to understand and emotionally. I think this kind of communication is very effective to convey intention of monetary policy to ordinary people with no economics educational background.

Wall Street Journal even described this way of Yellen’s speech as striking, because central bankers tend to use difficult economic jargon, which only can be understood by professional investor or academics. This make ordinary people to difficult understand monetary policy. It is interesting to watch how the first chairwoman lead the monetary policy, and this new communication style seems quite effective and fresh.

The U.S. Economy and Job Market Far From Healthy

Ever since the financial crisis a couple years ago, the U.S. has always been working on economy recovery. How close is the U.S. economy to healthy condition? According to Wall Street Journal, Janet Yellen, Federal Reserve Chairwomen, the U.S. economy and job market are still far from healthy, and still require plenty of support from the central bank’s low-interest-rate policy.

Regarding the U.S. economy, it is still considerably short of the two goals assigned to the Federal Reserve by the Congress – low and stable inflation and maximum sustainable employment. In order to deal with the U.S. economy, the central bank has implemented the low-interest-rate policies which include the actions such as reducing the level of short-term interest rates to near zero, and reducing longer-term interest rates and thus provide further support for the U.S. economy. The Federal Reserve has purchased large quantities of longer-term Treasury securities and longer-term securities issued or guaranteed by government-sponsored agencies such as Fannie Mae or Freddie Mac. Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses. The Fed has kept official interest rates at effectively zero since December 2008, and has vowed to keep them there for a considerable while longer. The recent decisions by the Fed are to reduce the amount of bonds it buys a month. In this sense, I believe that we can expect the long-term rates to go down.

How is the current employment situation in the U.S.? First of all, statistics on job turnover pointed to considerable slack in the labor market.  Firms are still reluctant to increase the pace of hiring although it is now laying off fewer existing workers. On the employees’ side, they are less likely to quite their job voluntarily because they believe it hard to find another. Secondly, the wages are not increasing as the decline in unemployment. In my understandings, if the wages remain almost unchanged, the increase in price level will make it harder for people to make a living and thus decrease the domestic purchasing power as well as the domestic demand. Lastly, the labor force participation rate falls in a slack of job market when people who want a job give up trying to find a new one. If this continues, I am afraid that the lower participation could mean that current unemployment stated (6.7%) is overstating the progress in the labor market.

Somewhere Ben Bernanke Was Smiling

In the midst of watching both the stock market and the FOMC snippets today, I had to laugh at the twitter backlash that seemed to follow the statement the FOMC Chairman Janet Yellen was making in her first meeting. The FED did what the street seemed to think it would do and cut QE by 10 billion dollars per month, evenly split between mortgage backed securities and treasury bonds. (Business Insider)

It was, in my opinion, a short statement which I am almost positive that Yellen was trying to keep the markets calm with her first FOMC meeting as chair. As she kept talking though, things started to get a little dicey. While investors listened to Yellen speak, their reaction to the seemingly “slightly hawkish” outlook on the federal funds rate the 10 year treasury rate spiked up as did futures for the FFR.

The tone in a WSJ article by Jon Hilsenrath, seemed to take the stance that Ms. Yellen had made a little bit of a rookie mistake here in how she handled the conference and that the markets probably should not worry too much about this. I have written before that I think the rising rate environment is quite good for the economy especially the banking sector which is just once again starting to do more than tread water.

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Yellen tried to make the point that the committee was steadfast on leaving rates low for the foreseeable future but another metric that came out spooked investors as well.

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This dot chart was what really seemed to spook investors in late trading hours and sent both the FFR futures contracts soaring as well as the ten year as I think people underestimated the hawkishness of the FOMC in the short run.

I think it is prudent for everyone to remember though, that Janet Yellen has been a steadfast dove in recent years and that this first news conference needs to be taken with a grain of salt. I do not know if she had any indication as to how the stock market was reacting during her statements, but she did even make a point as to say that she was going to try and make her statements as little of a source of instability as possible. At that point I smiled and realized that Ben Bernanke had to have enjoyed a comment like that as he got hammered throughout the latter parts of his career for supposedly lacking clarity in some of his statements.

I maintain the view that a rising rate environment is a continued sign of the overall health of the economy, even if the weather held things down a bit at the end/beginning of the year. Banks need to be what leads the markets into the next leg up of this long bull market and the rising rates should be a bit of a silencer to the naysayers of the economy overall.

Fed Drops Unemployment Target

In recent news, the Fed is still staying on course with the bond buying program. However, some changes have been made to expand the array of indicators used to start raising short-term interest rates, rather than solely focusing on the unemployment rate. Also, Yellen reported at the meeting that the Fed will keep short-term rates lower than usual even after the unemployment and inflation rates return to long-term levels.

In regard to the unemployment rate, the Fed has now decided to drop the connection that it once made to raising the interest rate once the economy has reached the 6.5% unemployment threshold. The Fed plans to use other measures that it believes will represent the situation more accurately, such as the U6 measure (includes marginally attached workers and those working part time but prefer full time work), the share of workers who have been unemployed for six months or more, the rate at which people are quitting jobs, and the share of adults who are holding or seeking jobs.

In terms of interest rates, the Fed plans to keep the short-term rate lower than usual even after the jobless rate and inflation rate return to long term levels. Since the Fed expects a 4% rate as the normal long-run rate, this implies that officials do not expect rates to get back to this level anytime soon. Later actions taken by the Fed were to continue in reduce its bond-buying program to $55 billion. The long-term goal of the program is to hold down long-term interest rates, thus boosting spending, hiring, and growth.

One discrepancy that I noticed in the report was that even though the Fed said it plans to keep rates low well after the Fed returns to the long-run trend, the projections of the actual officials seemed a bit aggressive. More specifically, “Ten of 16 officials saw short-term rates rising to 1% or more by the end of 2015, with four of them right at 1%. Six officials saw rates below 1% by the end of 2015. In December, ten officials saw rates below 1% by the end of 2015. Twelve of 16 officials saw the target fed funds rate rising to 2% or above by the end of 2016, while four officials saw rates staying below 2% by the end of 2016.” In my opinion, I found the projections of these officials in comparison with Yellen’s earlier statements to be contradicting. From Yellen’s report, it seems that the Fed thinks the economy isn’t good enough right now, but will accelerate in the next 12 months- therefore warranting higher interest rates… but the Fed said that it plans to keep rates low “for a considerable time” after the bond buying program ends, given that the program is scheduled to end this fall. However, I anticipate this vagueness has to do with the fact that it depends on the condition of the labor market later this fall. If there were still high unemployment in the labor market and the inflation rate were still running below 2%, this would be good reason to believe that the Fed would hold the interest rate near current levels.

Time to start saving again?

As all Economics 411 students should know by now, quantitative easing – or balance sheet monetary policy – won’t come back to haunt us in any scenario until the economy starts to heat back up. In that case, only by the Fed missing the signs of an economic rebound and failing to act would the U.S. economy be at risk of overheating. Professor Kimball defends this aspect of QE in many of his posts, but here is one that describes this scenario in more detail than I will go into on this post. In today’s Fed policy meeting, it became clear that some officials are already talking of dumping off assets accumulated through QE in the near future. Selling off these assets would mark an attempt to start bringing up the Federal Funds Rate and other short-term interest rates. Fed “Hawks” brought up the dangers of inflation as the tapering continues and is expected to end in Q4 of 2014.

Is it too early to talk about a boon, and of increasing rates that for years have been stuck near the zero lower bound? I don’t think so. With a strategy as new as QE, it seems that caution is much better than the alternative. And really, how far is the U.S. economy from finally ending talk of recession? As Fed chairwoman Janet Yellen has said, the jobless rate target will remain at 6.5% for the foreseeable future. But how far off is that? Recent news confirms that a strong recent push has brought America down to just a 6.6% unemployment rate. That’s exactly why planning ahead – even to something so foreign to us as inflation has been for the last few years – is imperative for the Fed, and now.

“‘We are a lot closer to a normal economy than we’ve been in a long time,’ James Bullard, president of the Federal Reserve Bank of St. Louis, said Wednesday in an interview. He sees the jobless rate hitting 6% by the end of the year, which he said could put pressure on officials to start considering rate increases.” -WSJ

While Mr. Bullard’s forecast of 6% seems to be an answer to our economic prayers, there is still a collective worry about the effects that dropping out altogether from the labor force have had. Some believe that while 6.5% sounds great, it is a long shot from the actual state of the U.S. economy at this point. And it’s only fair to assume we have a way to go, especially before the general population is convinced that the recession has passed. Most estimates have interest rates rising by late 2015 at the earliest, as inflation stands well below anything worrisome. It seems like a problem the U.S. economy won’t need to face for a while, but the inflation “Hawks” are starting to circle at the Fed.

Yellen’s Debut

On Tuesday, Janet Yellen set course for steady bond-buy cuts. The Federal Reserve plans to keep winding down bond buying unless the economy takes another decline. Ms. Yellen believes that some recent economic data has been soft, in that she thinks the drop in labor-force participation is more structural than cyclical. Her reasoning behind this is that many baby-boomers have reached their time to retire, so we can expect a large proportion of Americans to be retiring at the same time.

Ms. Yellen served on the committee that helped formulate the current bond buying/tapering strategy, so she strongly supports this strategy. Before being sworn in last week, she had been the Fed’s vice chairwoman for more than three years. In her position as vice chairwoman, she pushed aggressively for the Fed to adopt easy-money policies and encouraged borrowing, spending, investment, and hiring. However, she suggested through her comments that she plans to gradually move away from these policies as the economy improves.

Later in her speech, Yellen articulated that she anticipates economic activity and employment to expand at a moderate rate this year and next. She anticipates the unemployment rate to continue to decline toward its longer run sustainable level and inflation will move back toward 2 percent over the coming years. Touching again on the drop in labor force, Ms. Yellen suggested that we use more than the unemployment rate when evaluating the current state of the United States labor market because those out of a job for more than the past six months make up an unusually large fraction of the unemployed. More factors contributing to the current unemployment rate are the high rate of adults working part time who want full-time jobs and also the number of Americans who lack the confidence to leave their jobs. (see below)

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Moreover, Yellen also spoke about the Fed’s internal debate over how much weight to put on the unemployment rate as it drops. In December, they said they wouldn’t raise short-term interest rates from near zero until unemployment fell to 6.5%. It fell to 6.6% in January…

In my opinion, I believe that the slowdown in bond purchasing is great. However, I do believe that we will face problems once inflation levels fall short of the Fed’s 2% target. This scenario relates back to the discussion that we had last class, where some inflation is always necessary in order to get leeway on the zero lower bound. With the unemployment rate quickly approaching the 6.5% threshold, it will be interesting to see how the Fed will react.