Three weeks ago, when the Fed and Janet Yellen shocked markets with their extremely dovish statement in which they admitted the US Federal Reserve no longer is US data dependent, and instead is far more focused on global developments and especially China’s dollar-pegged currency (which makes it impossible for the Fed to be hawkish without causing further FX instability and leading to more Chinese capital flight), CNBC’s Steve Liesman asked Yellen point blank a question which would seem otherwise completely taboo: does the Fed have a credibility problem.
This was her response:
Well, let me start — let me start with the question of the Fed’s credibility. And you used the word “promises” in connection with that. And as I tried to emphasize in my opening statement, the paths that the participants project for the federal funds rate and how it will evolve are not a pre-set plan or commitment or promise of the committee. Indeed, they are not even — the median should not be interpreted as a committee-endorsed forecast. And there’s a lot of uncertainty around each participant’s projection. And they will evolve. Those assessments of appropriate policy are completely contingent on each participant’s forecasts of the economy and how economic events will unfold. And they are, of course, uncertain. And you should fully expect that forecasts for the appropriate path of policy on the part of all participants will evolve over time as shocks, positive or negative, hit the economy that alter those forecasts. So, you have seen a shift this time in most participants’ assessments of the appropriate path for policy. And as I tried to indicate, I think that largely reflects a somewhat slower projected path for global growth — for growth in the global economy outside the United States, and for some tightening in credit conditions in the form of an increase in spreads. And those changes in financial conditions and in the path of the global economy have induced changes in the assessment of individual participants in what path is appropriate to achieve our objectives. So that’s what you see — that’s what you see now.
Got that? Apparently neither did Liesman, who openly admitted in his traditional post-Fed spar with Rick Santelli, the following:
Santelli: Steve, could you understand any of it? Any of it seriously? Just a yes or no.
Liesman: Not much, it was not precisely responsive to the question i asked.
Then, yesterday afternoon, during the International House “round table” discussion in which for the first time ever the last four Fed chairs sat down to share their “philosophy”, moderator Fareed Zakaria in the aftermath of Donald Trump’s recent comments wasted no time in asking Yellen the other question everyone wants to the answer to: “are we in a economic bubble? Is the economy as perilous as some people on the political campaign are suggesting.”
This is what Yellen responded:
“So I would say the US economy has made tremendous progress in recovering from the damage from the financial crisis. Uh, slowly but surely the labor market is healing. Um, for well over a year we’ve averaged about 225,000 jobs a month. The unemployment rate now stands at 5%. So, we’re coming close to our assigned congressional goal of maximum employment. Um, inflation which, um, my colleagues here paul and allen um, spent much of their time as chair um, bringing inflation down from unacceptably high levels. For a number of years now inflation has been running under our 2% goal and we’re focused on moving it up to 2%. Um, but we think that it’s partly transitory influences, namely declining oil prices, and uh, the strong dollar that are responsible for pulling inflation below the 2% level we think is most desirable. So, I think we’re making progress there as well, and this is an economy on a solid course, um, not a bubble economy. Um, we tried carefully to look at evidence of potential financial instability that might be brewing and some of the hallmarks of that, clearly overvalued asset prices, high leverage, rising leverage, and rapid credit growth. We certainly don’t see those imbalances. And so although interest rates are low, and that is something that could encourage reach for yield behavior, I wouldn’t describe this as a bubble economy.”
Speaking of the reach for yield, and the Fed being unable to see “rising leverage”, here is just one chart from Citigroup:
As for the US not being a bubble economy, we are confident the Fed’s “macroprudential regulators” are looking at something. It is just not this:
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