Three takeaways from Yellen's speech that outlines her cautious approach to imminent monetary policy changes
Why she favors restraint
The Yellen speech had it's share of optimism but also concerns. Below are three takeaways that address why the Fed Chair will remain more cautious going forward.
- "My overall assessment is that the current stance of monetary policy is generally appropriate, in that it is providing support to the economy by encouraging further labor market improvement that will help return inflation to 2%". This suggests she thinks the economy needs the stimulus that the Fed is currently providing. She tempers that a bit by adding, "At the same time, I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run." This characterized a lot of the speech whereby she said something, but either outlined the risk or outlined the positive (if it was bad). This statement suggests the Fed Chairs reluctance to act now. She cites that with inflation below target, an overshoot of unemployment target would help inflation move back to 2%. She also said a stronger job market could encourage more labor market participation and finally that constraint can be added if the economy heats up above their expectations.
- Yellen is concerned about domestic demand. She feels that the US relative out performance globally "has relied chiefly on the resilience of domestic sources of demand, consumer spending in particular." That is the good. She then added the bad, "an important question is whether the U.S. economy could continue to make progress amid fairly considerable global bumpiness." She commented that she "think(s) that the answer to that question is yes" However the "but" for her hopeful optimism is that "weak investment performance in recent months is concerning, and Friday's employment report provides another reminder that the question is still relevant." She has her doubts.
- Yellen does not know how productivity will play out. She characterizes productivity growth as a "key determinant of improvements in living standards, supporting higher pay for workers without increased cost for employers". However, she does not know how productivity will go. She added "But this is a very difficult question, and economists are divided. Some are relatively optimistic, pointing to the ongoing pace of innovations that promise revolutionary technologies, from genetically tailored medical therapies to self-driving cars. Others believe that the low-hanging fruit of innovation largely has been picked and that there is simply less scope for further gains. The chairman does not know which way the productivity in the future will go. So why risk it.
June seems off the table. Is July? More data will of course help. That seems to be the consistent conclusion and perhaps done on purpose as she really does not know.