ETF Securities Research Blog

Yellen’s speech: finely balanced and revealing little

Investors expecting a strong signal about the Federal Reserve’s course of action over the coming months were disappointed. At the annual Jackson Hole Symposium, the Fed’s Chair essentially towed the central bank’s line that it remains data dependent.

Her line:
“I believe the case for an increase in the federal funds rate has strengthened in recent months”

was quickly followed by:

“Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook. And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course.”

Her speech was more focused on how the central bank’s toolkit has changed since the financial crisis and that the expanded toolkit can weather through the next storm, whenever that arrives. She views the new tool kit as sufficient, even if we are in a lower natural interest rate environment (with some potential modifications, such as buying a wider range of assets under quantitative easing). However, it is clear that that capacity of the Fed to do all the heavy-lifting again is limited. She suggested that Congress also needs to play its part in providing fiscal stimulus in the next crisis. Additionally, to raise productivity (as a measure to limit the risk of a crisis), she suggests more education. It seems like most of the hard work will need to take place outside of the Federal Reserve.

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