We Still Aren’t Sure What Will Cause Janet Yellen to Pull the Trigger

One way or another, rates must go up.


The central bank is facing a communications problem.

The effectiveness of the Federal Reserve’s communication strategy is clearly questionable when the outcome of a Federal Open Market Committee meeting is considered a coin toss among economists who closely follow monetary policy.

What’s missing from the central bank’s communication strategy?

In my opinion, the blame lies at the feet of Janet Yellen, who chairs the Federal Reserve.

Yellen appears to have been effective at shifting the policy debate within the FOMC in her direction. But she’s been less effective at forming a consensus about the near-term guideposts for policy. The lack of such a consensus leaves only the Fed’s estimate of the natural rate of unemployment as the key goalpost—and the U.S. economy has already crossed that goal, for all intents and purposes.

What might be Yellen’s current near-term objective for unemployment?

Again, we don’t know her forecast for certain, but the lower bound of the 2016 unemployment forecasts is 4.5 percent. Assuming that is Yellen’s forecast, the figure implies she would be hesitant to allow the unemployment rate to drop much below 5 percent before giving the green light to the FOMC hawks, who so desperately wanted to embark on the normalization process sooner than later. That keeps a December hike on the table It is very much on the table, in fact—but only assuming the goalposts don’t shift again.

Bottom Line: I suspect Yellen is pulling the committee toward her position, but she is hesitant to define that position publicly. This, I think, is the central problem with policy communication as the Fed navigates the inflection point between the zero bound and a rate increase. If Yellen is the key force within the FOMC, then it is increasingly important, from a communications perspective, for her to take ownership of policy. We need a clear picture of Yellen’s policy reaction function. Her ‘dots’ are too important to not be revealed if the Fed is to effectively communicate policy. What are her goalposts and how do they move? Hopefully she will provide some clarity on these points in her speech on Thursday.

Full article: We Still Aren’t Sure What Will Cause Janet Yellen to Pull the Trigger (Bloomberg Business)

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