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A Sensible and Articulate Fed Chair?

Irwin M. Stelzer

Janet Yellen made her first appearance before Congress since assuming the chair of the Federal Reserve Board and produced the yawns she was seeking, even thanking several of her interlocutors for calling her “unexciting.” Knowing that some Fed critics are seeking to rein in the bank’s independence (several of these critics would like to eliminate the Fed entirely), Yellen offered to stay for as long as necessary-six hours, as it turned out-in the hope that demonstrating such heightened transparency will head off legislation to politicize the central bank. The examples of Japan and Britain, where the central bankers have become aligned with Prime Minister Shinz┼Ź Abe and Chancellor of the Exchequer George Osborne, respectively, apparently do not appeal to her.

She won nods of approval for using simple sentences rather than the more opaque and convoluted structures preferred by her predecessors. Republican congresswoman Shelley Moore Capito thanked her, “I’ve understood more of what you’ve said today than I have probably [from] the last two folks that were in front of us.”

What Yellen said was a mixture of the expected and, for those who listen carefully, a clue to a subtle but real change in policy to reflect Yellen’s diagnosis of what ails the labor market. The Fed chair went to great lengths to give the impression that policy would be steady as she goes. “Let me emphasize. I expect a great deal of continuity in the approach to monetary policy”; we will continue reducing asset purchases at the rate of $10 billion per month and keeping interest rates at zero. But she added that Fed policy “is not on a pre-set course.” In other words, we will keep doing what we have been doing unless we decide to change our policy. So much for what has come to be called “forward guidance,” the attempt by the Fed and other central banks to let the public, and especially the markets, know where policy is headed. As in Britain, where Societe Generale economists have declared Bank of England “forward guidance, R.I.P.” so, too, in the U.S. Yellen announced that a fall to the 6.5 percent unemployment rate that the Fed had said would trigger tighter monetary policy is not an adequate gauge of labor market health, and that the Fed’s zero interest rate policy will continue “well past the time” that the unemployment rate falls from its current level of 6.6 percent to the now-discarded trigger of 6.5 percent.

Quite sensibly, she intends to look at the number of the long-term unemployed, the labor-force participation rate, and the number of workers involuntarily working only part time, in order to get a true picture of labor-market conditions. Not to mention studying incoming data, including another jobs report that will be available to the monetary policy committee when it meets again on March 18-19.

By that time we will know whether recent unhappy news is a mere bump on the road to the more robust recovery that forecasters were predicting at the end of last year, or a more serious and permanent setback. Recall:

  • Retail sales fell by 0.4 percent in January, and December sales figures were revised to -0.1 percent from +0.2 percent. “A significant disappointment,” say Goldman Sachs’s economists. So, too, the drop in industrial production in January.
  • Auto sales seem to be weakening sufficiently to have automakers nervous enough to reinstitute discounts.
  • Housing markets are coming off the boil as mortgage rates inch up and more and more potential buyers insist on a “second look” at available properties rather than immediately entering bids.
  • Jobs reports for December and January were not encouraging.
  • We are experiencing “A profit cycle that may be peaking,” according to the Lindsey Group.
  • International markets are in turmoil and in denial: Argentina’s cabinet minister blames his country’s turmoil on economists, “I know all of them [the economists]. They are all undercover agents…. Independent, objective economists don’t exist.”

These negative bits of news prompted the nonpartisan Congressional Budget Office (CBO) to downgrade its intermediate-term growth forecast. Yellen, however, remains unperturbed, at least so far. She and her colleagues “anticipate that economic activity and employment will expand at a moderate pace this year and next. … Recent volatility in global markets … do[es] not pose a substantial risk to the US economic outlook.” My own guess is that when next they meet Yellen & Co. will find that the economy is indeed recovering, but that the labor market is not responding to that recovery as positively as the chairman would wish.

Economists are debating just how much of the decline in employment and increase in retreat to the couch and the dole-the impolite way of saying the fall in the labor force participation rate-is cyclical, how much is structural, and how much is due to misbegotten policy initiatives. A close reading of Yellen’s testimony suggests that although she recognizes the effect of demographic factors such as an increase in retirements, she believes that a faster growing economy would solve much of the unemployment problem. So, unlike some of her colleagues on the monetary policy committee, and emboldened by a low (below 2 percent) inflation rate, she believes the Fed should continue to attempt to stimulate growth in order to reduce unemployment, which I believe she sees as largely, although not entirely, cyclical in nature.

Other equally respectable economists argue that Fed-induced more rapid growth-if indeed such a speed-up is in the Fed’s power-will do little to give the unemployed the skills and incentive they need to return to full-time employment. And then there are those who believe that even if Fed policies could stimulate economic growth, the bank can do little to speed up hiring significantly. They cite a recent CBO report that Obamacare, by substituting subsidies for a job as a condition for obtaining affordable health insurance, will destroy the equivalent of 2.5 million jobs and reduce the economy’s long-term growth rate. And add that hiring is restrained by new safety regulations, refusal to permit construction of an oil pipeline from Canada, efforts to close down the coal industry, and a perverse system that causes unemployed workers taking a job to lose almost as much in benefits and taxes as they gain in wages. The list of job-killing policies goes on and on.

If Yellen attempts to overcome these difficulties by running the printing presses ever faster, as her concern for the unemployed might tempt her to do, she will make her predecessor seem a reluctant money-creator indeed.

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