Pressure on Yellen increases, and rightly so

A James Alexander post

We had been fearing that after the poor first quarter the mini-recovery in April might tip the FOMC into a bolder stance towards their goal of 3-4 rate hikes in 2016. The FOMC heavily spun the April Minutes, released in May, as a warning of tougher monetary policy ahead and certainly showed we were right to be worried.

The prospect of faster than expected monetary tightening hit the markets badly in mid-May. The negative impact on the economy in actual May surveys and data was not such a surprise given how weak 1Q had been and given the Fed tightening bias.

Many surveys of the current state of the economy in May were already pointing to a sharp deceleration in the economy even before the May payroll data confirmed it. Other figures like Industrial Production have since added weight to the notion that the US economy is growing very sluggishly or even in an early recession.

We had already pointed to the downturn in the Fed’s own Change in Labor Market Conditions Index back in April and again in May as signalling that the Fed should pay attention to this summary of labor markets, but they had steadfastly ignored it. The May reading released in June and earlier revisions showed the trend to have been even worse than thought. Many had already picked up on our earlier warning and the May figure alerted even more to the downturn, so much so that Yellen was picked up on it at the press conference after the June FOMC meeting last week.

BINYAMIN APPLEBAUM. The Fed created a Labor Market Conditions Index a couple of years ago that was designed to sort of bring together a lot of these factors in labor market that you’ve talked about, as I’m sure you know it’s been falling since January. That suggests to some people that it was your decision to raise rates in December that has caused this weakening in the labor market. Could you address what role if any you think the Fed’s decision to raise rates has played in the slow down we are now seeing?

CHAIR YELLEN. Well, let me just say the Labor Market Conditions Index is a kind of experimental research product that’s a summary measure of many different indicators and essentially that measure tries to assess the change in the labor market conditions. As I look at it and as that index looks at things, the state of the labor market is still healthy, but there’s been something of a loss of momentum.

The 200,000 jobs a month we saw, for example, in the first quarter of the year that’s slowed in recent months. Exactly what the reasons are for that slowing, it’s difficult to say. It may turn out– you know, again, we should never pay too much attention to, for example, one job market report. There’s a large error around that we often see large revisions, we should not over blow the significance of one data point especially when other indicators of the labor market are still flashing green. Initial claims for unemployment insurance remain low, perceptions of the labor market remain fine. Data from the jolts on job openings continue to reach new highs. So, there’s a good deal of incoming data that does signal continued progress and strength in the labor market, but, as I say, it does bear watching.

So, the committee doesn’t feel and doesn’t expect and I don’t expect that labor market progress in the labor market has come to an end. We have tried to make clear to the public and through our actions and through the revisions you see have seen over time in the dot plot that we do not have a fixed plan for raising rates over time, we look at incoming data and are prepared to adjust our views to keep the economy on track and in light of that data dependence of our policy I really don’t think that a single rate increase of 25 basis points in December has had much significance for the outlook. And we will continue to adjust our thinking in light of incoming data and whatever direction is appropriate.

Hoist on her petard, is what comes to mind in her response. One data point, like payrolls for one month, sure doesn’t mean much, but a “data point” consisting of a summary of 19 data points is not a data point but a clear trend. It has hard to see how Yellen interprets it as “a still healthy labor market”. It is fortunate she is not a medical doctor, just a doctor of economics.

She obviously cannot admit that the downturn in the labor market is anything at all to do with the December rate rise. Narrowly speaking she is correct that raising rates by 25 basis points was not such a big deal in itself, the markets didn’t move very much on the announcement. However, what she and the FOMC are culpable is the year long pre-raise signalling and post-raise spinning about more to come. The signalling of future moves is everything and are a massive deal – and are what will define her leadership of the Fed.

Last week’s press conference and the likely tone of this week’s bi-annual testimony to Congress could well be signs that the mass of opinion is beginning to gang up on her. We think that this is good as she will be squarely responsible for any recession given her consistent ignoring of weaker and weaker nominal growth expectations, seemingly blind pushing on of “normalization” of rates and obsession with non-existent Philips Curve fantasy-land inflationary pressures.

2 thoughts on “Pressure on Yellen increases, and rightly so

  1. Due to the size of the Fed’s balance sheet, the Fed would have had to sell over two trillion in securities to get the Fed funds rate to move 25 bps if it hadn’t used IOR. So the Fed should not be so blase about what these 25bps means because this it the first time in its existence that it has raised the FFR by using IOR to raise it. In the past, OMO to move the FFR by 25bps were magnitudes smaller. They truly are in uncharted waters and don’t even have a sextant on hand.

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