If you have been a long-time reader of this site you know what the Fed did at its policy meeting yesterday even before you read it here. They did what they always do. They delayed a hike yet again and for the umpteenth time during this recovery they moved the goal posts on when the next hike would come.
For the financial economists who follow these things closely, the Bernanke/Yellen Fed has become a joke. So rather than offering any serious commentary on the Fed’s decision, let’s have some fun.
Below are some of the questions Yellen was asked yesterday and how I imagine a more candid version of Yellen would have responded.
Q1: Steve Leisman CNBC, Madame Chair critics of the Federal Reserve have said that you look for any excuse not to hike, that the goal posts constantly move and it looks indeed like there are new goal posts now when you say “looking for further evidence” and you suggest that it’s evidence that labor market slack is being taken up. Could you explain what “for the time being” means in terms of a time frame, and what that further evidence you would look for in order to hike interest rates, and also this notion that the goal posts seem to move and you have indeed introduced a new goal post with this statement. Thank you.
Candid Yellen: Of course we are moving the goal posts. Haven’t you been paying attention over the last eight years Steve? Every time the economy gets close to our target we find another reason to keep rates low. Listen, we have no idea what is going on with the economy. Most of us have never worked outside of the protected confines of tenured professorship. We’ve never had to meet a payroll, market a product, make a loan or even had our livelihood affected by the accuracy of our forecasts. Why the public looks to us to implement policies that drive growth is a mystery to us.
Q2: Howard Schneider with Reuters, Hi Chair, thanks for this, I was wondering if you could comment a little bit on the apparent tension between this steady drift down in the long run rate, and the steady drift down in some of the projections and the seeming march toward a rate hike. If the neutral rate’s coming down over time and continues coming down and you’re eating up accommodation that way anyway why not wait for the dust to settle on that before moving rates up?
Candid Yellen: Ha, you actually take our estimates of the long-run interest rate seriously? These are a shot in the dark. We’ve only lowered our estimates of the long-run Fed funds rate because we don’t want to cop to the fact that we completely missed the boat on interest rate hikes this cycle. The reason growth is as slow as it is with interest rates as low as they are, is that we are in the late stages of the business cycle. Most of the research we cite on a falling long-run Fed funds rate was done in the last couple of years by our own staff. Obviously we have an ax to grind. We talk about a so-called zero percent neutral rate, but that’s only to confuse the public. If you really believe that short-term interest rates after adjusting for inflation should be zero, you believe there is no opportunity cost to money. Even an Econ 101 student knows that’s a farce.
Q3: Marty Crutsinger with the Associated Press. Last month in your speech at Jackson Hole you seemed to raise expectations that there could be a rate hike in September. Other fed officials talked including Vice Chairman Fisher, they seemed to support that. Fed President Rosengren had some comments that sent the markets plunging. Then we had Gov. Brainard seemed to draw back. Is this hurting the Fed’s credibility do you think? Or is this just the normal thing that we should be looking for at this time, uncertain time with the economy?
Candid Yellen: Listen, it was probably a huge mistake when my predecessor decided to give 12 cackling professors, a voice at the table. Trying to get all 12 of us to come to a consensus and communicate that to the public is like herding cats. You probably shouldn’t listen to anything we say. Our models have proven to be largely ineffective over the last decade so we are making most of this stuff up as we go along.
Q4: Jon Hilsenrath from the Wall Street Journal. Chair Yellen, Donald Trump, the Republican Presidential nominee has charged that the Fed is keeping interest rates artificially low to support the Obama administration. I’d like to hear what you have to say to that charge. On a related note I wanted to ask you about the Fed’s next policy meeting which is in early November a week before the next election. Given that the case for raising rates you say today has strengthened, should the public see that November meeting as a live meeting when a rate action could happen.
Candid Yellen: Of course I’ve kept rates low to help the President. He is after all my boss. We talk a big game at the Fed about being politically independent, but if you think my world-view isn’t influenced by my political bias you are fooling yourself.
Q5: Madame Chair, Craig Torres from Bloomberg. What observable data would convince you and the committee that this neutral federal funds rate is starting to move up. There’s a popular piece of research by one of your colleagues that suggests it’s at zero right now. And second I’m struck by your opening remarks that the economy isn’t overheating. Does that mean the committee sees this global reach for yield going on right now as very low cost to its policy? Thanks.
Candid Yellen: I’ve already answered the first part of your question. On the second questions, we’ve definitely encouraged bubble conditions everywhere, but when the next bust hits we’ve fine-tuned our strategy for pushing the blame onto others. We used this strategy pretty effectively in the aftermath of the financial crisis. The big banks took all the blame and few even noticed that our low rate policy following the 2001 recession was the spark that started the blaze. Congress even gave us more responsibility.
The fact is we use so much jargon and so much math, that only a small part of the public really grasps the massive influence our policies have on their lives. It’s a good thing too, because as Henry Ford said decades ago, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
FOMC Press Conference, September 21, 2016
Jeremy Jones, CFA
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