The Most Dovish, Pro-Loose Money Thing You’ll See All Day


If you want the straight, unadulterated, pro-cheap money argument, go read Fed Governor Janet Yellen speaking on commodity prices in NYC.

The gist: Sure commodity prices have gone up, but unless we see a classic wage price spiral, there’s no good reason for the Fed to worry.

Here’s the conclusion….


Let me now turn to the stance of monetary policy. As you know, monetary policy has been highly accommodative since the financial crisis intensified. In December 2008, the FOMC lowered the target federal funds rate to near zero and started to provide forward guidance concerning its likely future path. As in its statements since March 2009, the Committee reiterated last month that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” In addition, the FOMC has purchased a substantial volume of agency debt, agency mortgage-backed securities, and longer-term Treasury securities. The Committee initiated a second round of Treasury purchases last November and has indicated that it intends to complete those purchases by the end of June. My reading of the evidence is that these securities purchases have proven effective in easing financial conditions, thereby promoting a stronger pace of economic recovery and checking undesirable disinflationary pressures.

I believe this accommodative policy stance is still appropriate because unemployment remains elevated, longer-run inflation expectations remain well anchored, and measures of underlying inflation are somewhat low relative to the rate of 2 per cent or a bit less that Committee participants judge to be consistent over the longer term with our statutory mandate. However, there can be no question that sometime down the road, as the recovery gathers steam, it will become necessary for the FOMC to withdraw the monetary policy accommodation we have put in place. That process will involve both raising the target federal funds rate over time and gradually normalizing the size and composition of our security holdings. Importantly, we are confident that we have the tools in place to withdraw monetary stimulus, and we are prepared to use those tools when the right time comes.

Of course, there are risks to the outlook that may affect the timing and pace of monetary policy firming. In my view, however, even additional large and persistent shocks to commodity prices might not call for any substantial change in the course of monetary policy as long as inflation expectations remain well anchored and measures of underlying inflation continue to be subdued. As I noted earlier, a surge in commodity prices unavoidably impairs performance with respect to both aspects of the Federal Reserve’s dual mandate: Such shocks push up unemployment and raise inflation. A policy easing might alleviate the effects on employment but would tend to exacerbate the inflationary effects; conversely, policy firming might mitigate the rise in inflation but would contribute to an even weaker economic recovery. Under such circumstances, an appropriate balance in fulfilling our dual mandate might well call for the FOMC to leave the stance of monetary policy broadly unchanged.

That said, in light of the experience of the 1970s, it is clear that we cannot be complacent about the stability of inflation expectations, and we must be prepared to take decisive action to keep these expectations stable. For example, if a continued run-up in commodity prices appeared to be sparking a wage-price spiral, then underlying inflation could begin trending upward at an unacceptable pace. Such circumstances would clearly call for policy firming to ensure that longer-term inflation expectations remain firmly anchored.