Federal Reserve Chair Janet Yellen doesn’t want to follow anyone’s rules.
On Friday at the Jackson Hole economic symposium, Yellen spoke on the state of the labour market and how these dynamics effect monetary policy.
In addition to noting that there still remains “significant” underutilization of labour resources, Yellen said she expects the Fed’s understanding of labour markets and their impact on inflation will remain “far from perfect” while emphasising that “monetary policy is not a preset course.”
“As a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model,” Yellen said, “but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.”
These comments can on the one hand be read as the careful words of a policy maker. On the other hand, Yellen is fighting off a movement in the House seeking more oversight of the Fed.
In July, the House Financial Services Committee held a hearing on the proposed Federal Reserve Accountability and Transparency Act, or FRAT Act.
In comments at this hearing, Committee Chairman Jeb Hensarling (R-TX) said:
“Let me make one thing clear at the outset. We do not suggest for a moment that Congress, much less the White House or Treasury, should conduct monetary policy operations. We continue to respect the Federal Reserve’s independence in monetary policy. But that independence and discretion must be paired with appropriate transparency and accountability. What we require today in this legislation is that the Fed use a clear map of its own choosing to set the course for monetary policy and share that map with the rest of us.”
Basically, the GOP wants the Fed to implement some version of the Taylor Rule.
The Taylor Rule is a formula that provides “recommendations” for where the Fed should set short-term interest rates.
In comments during Yellen’s July testimony on Capitol Hill, Hensarling went a step further, claiming that, “Had a clear, predictable monetary policy rule like the Taylor Rule been in place throughout the last decade, it is likely the financial crisis would have been avoided in the first place, or at least downgraded to a garden variety recession.”
Hensarling said the FRAT ACT “no way, shape or form dictates monetary policy,” but in her testimony on Capitol Hill, Yellen clearly chafed at the idea of following the Taylor Rule or a similar formulation.
During that testimony, Yellen said, “It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule.”
On Friday, Yellen again sought to give the Fed maximum flexibility for the course of its monetary policy.
With respect to the Fed’s forward guidance, Yellen said, “the reformulated forward guidance reaffirms the FOMC’s view that policy decisions will not be based on any single indicator, but will instead take into account a wide range of information on the labour market, as well as inflation and financial developments.”
In December 2012, the Fed dropped a 6.5% unemployment rate goal from its forward guidance, and since then has opted for language like, “This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”
The overall tone of Yellen’s remarks on Friday are being interpreted as something short of hawkish, but not as dovish as they could’ve been.
Yellen, however, clearly remains focused on giving herself and the FOMC as much flexibility as possible with respect to when and where interest rates go, and part of this flexibility also likely depends on the Fed maintaining its current relationship with Congress: independent.
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