Yellen Punt Prompts Panic
Fed chief isn't changing anytime soon, but even a hint of a taper is enough to scare people.


The spring of 2014 has not yet begun, but a jittery Wall Street was spooked Wednesday by the prospect that interest rates might rise “as soon as” the spring of 2015.

That was the immediate response to Federal Reserve chairwoman Janet Yellen’s first press conference since taking office. Yellen’s mere suggestion that the Fed might someday pursue a less inflationary policy has been blamed for a drop in the Dow Jones Industrial Average, and armchair central bankers are jumping on the rookie Fed chief for talking the market down.

Fed watchers were quick to blame Yellen’s rambling responses for the fall, which took the Dow from a high of 16,363.32 down to 16,126.29 — a decline of less than 2 percent but nevertheless enough to create a furious response from observers who fear a world without perpetual public support for Wall Street. The Dow reinflated late in the day to close at 16,222.17.

Yellen critics differed on what she did wrong, however. BusinessWeek’s Peter Coy charged her with committing the “rookie mistake” of “speaking too clearly.”’s Richard Gobel, on the other hand, said the Fed chairwoman is “confusing us all.” MarketWatch’s Rex Nutting split the difference by pointing out that while Yellen spoke for an hour, the market “only heard three words: ‘around six months.’”


Yellen was referring to her vague ambition to complete the “taper” of the Fed’s quantitative-easing program, which has quadrupled the U.S. monetary base since 2007, and afterward ease up on the Fed’s unprecedented suppression of interest rates. The winding down of QE could be completed this this fall, Yellen hinted [pdf], and interest-rate hikes could begin half a year after that:

YELLEN: I ‐‐ I simply meant to say that if we continued to reduce the pace of our asset purchases in the manner that we have, in measured steps, that the program would be winding down next fall.
QUESTION: In this coming fall, you mean, not the fall of next year. Was that…
YELLEN: Yes, this coming fall.
QUESTION: … just to be clear. I just wanted to be clear about that. Then once you do wind down the bond‐buying program, could you tell us how long a gap we might expect before the rate hikes do begin?
YELLEN: So, the language that we use in this statement is considerable, period. So, I ‐‐ I, you know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing. But, you know, it depends ‐‐ what the statement is saying is it depends what conditions are like.
We need to see where the labor market is, how close are we to our full employment goal. That will be a complicated assessment, not just based on a single statistic.

Both goals — winding down quantitative easing and raising interest rates — were speculated about for years by Yellen’s predecessor, Ben Bernanke, using much the same language Yellen used Wednesday, but little came of it. The QE program, in which the Fed increases the monetary base by buying bonds from banks, began to wind down in December. Fed purchases dropped from a rate of $85 billion per month to $75 billion at the Fed’s December meeting, then to $65 billion in its January announcement. The rate of purchases announced at Wednesday’s meeting is $55 billion per month.

The Fed’s accommodationist policies have succeeded in reinflating the real-estate and stock markets — both of which remained overvalued by historical standards even at the depth of the recession — but it has done little to spur economic growth as measured by new-business formation, job creation, or other measures.

Yellen is fortunate that few observers grasp the falsehood at the center of the Fed’s “dual mandate” of managing inflation and maximizing employment. This mandate is based on an antique economic theory called the “Phillips Curve,” which posited an inverse relationship between inflation and unemployment.

The Phillips Curve, a relic of Keynesian mythology, has been abandoned by economists after repeatedly failing to bear out in reality — most notably during the stagflation of the 1970s and the unprecedented economic stagnation of the past eight years. Since 2006, Bernanke has quadrupled the monetary base, and inflation — which is widely described as being under control or even too low — has in fact robbed the dollar of 16 percent of its value, according to the Bureau of Labor Statistics’ inflation calculator. Yet the economy has moved sideways, unemployment remains at 6.7 percent, and household net worth is about where it was prior to the recession, amounting to a massive disappearance of buying power with no discernible positive effects on the economy.

Tags: Federal Reserve