Two main themes came out of the new Chairperson of the Federal Reserve, Janet Yellen’s testimony before Congress today: a desire for the 2% inflation target to mean something and to get consistent with the full employment mandate.
It’s all very interesting to hear. It’s the kind of thing I’ve wished to hear from Bernanke the last handful of years and never did. But while I believe she is well intentioned, being able to actually deliver is much different than talking about it with a group of politicians saying that the present policy is one she fully supports when the present policy of taking one step forward for every three steps back isn’t going to get us there. Ten-year government bond yields are screaming from the rooftops that we’re looking at about 1.5% average annual inflation for a decade if policy remains the same. So we can put a huge red X in the fail column for hitting the inflation target. This also means we can forget about the Yellen Fed making up for undershooting; put another huge red X in the fail column. And if the Yellen Fed isn’t going to hit the target, then any reasonable measure of full employment will likely generate another mark in the employment mandate fail column if policy remains the same. It isn’t rocket science to cut through all of the low interest rate voodoo to the chase.
I really don’t intend to be so hard on Yellen. I actually like her; and present policy is better than the one that preceded it. But it will fall quite short of the red line spelled out in the legal mandates and short of the rhetoric; and I didn’t get a warm-fuzzy that she will be doing anything different when different is required. Different was required 6 years ago and we are all still waiting for the hammer of Rooseveltian resolve to drop on the Fed. But it won’t happen by the magic hammer fairy, and the markets are saying Yellen isn’t going to do it either – at least not yet, anyway.
I guess I need to just put away the ‘large and in charge’ vision I had of her and accept that we’re likely going to have to go through some more pain before someone decides we’ve had enough misery. As if we haven’t had enough of dysfunctional monetary policy already.