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.

7 thoughts on “Yellen’s Debut

  1. enjar

    If we look at the bottom graph, the number of people who are quitting part time jobs are increasing. That might be a sign that the workers are expecting better economy coming and good full time job market in coming months

  2. gkugler

    I agree with you that we must not lose sight of the Fed’s 2% target for inflation. Currently, we are well below this target and this should be concerning. I think it is a sign that corporations are holding cash and not spending it. As we discussed in class, the Fed can pump as much money as it wants into the economy but if corporations hold excess reserves rather than spend there will be no (or very low) inflation. Once the economy picks up and corporations start spending, then we might see inflation approach the 2% target. At this point, the Fed would just need to absorb excess liquidity (which I think it is very capable of doing). At this point, I believe the much larger problem is disinflation leading to deflation because that is something the Fed will have trouble handling.

  3. gaochen

    It’s very interesting to know about Ms. Yellen’s opinions. And I agree with her idea that it is necessary to not only use unemployment rate as the unique gauge for labor market.

  4. alexfigu@umich.edu'alexfigu

    It seems like the 6.5% unemployment goal will be hit very soon, yet fundamentally the economy is not as strong as we hoped it would be at this point. I think the biggest concern is the low level of inflation. This should signal that many firms are still holding money.

  5. sekoch

    As part time workers have become more confident and are beginning to quit their jobs, it will be interesting if those out of the labor force will begin to slowly come back. If so, the 6.5% unemployment goal may not be reached as soon as we think. However, if the economy continues to rebound as it has, I think we can expect the moderate decrease to continue over the upcoming months.

  6. mdbold

    You make a good point about the dangers of low inflation. Hopefully we won’t need to go back to the zero lower bound for a while after the economy recovers, but it’s always good to have the option.

  7. viczhou

    It’s really a booster for the market that Yellen is committed to the QE tapering continuously and steadily. Also, as you mentioned, the Fed had to face a critical trade-off between unemployment and inflation, given that a certain level of inflation is necessary and the unemployment rate might not be as good as it seemed to be.

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