From today's Bloomberg.com
Janet Yellen Just Completed a Great First Year. Year Two Will Be Harder
Don't Miss Out —
Follow us on:
Facebook Twitter Instagram Youtube
by Joseph Weisenthal
9:25 AM CST
February 3, 2015
Fed Chair Janet Yellen
Photographer: Andrew Harrer/Bloomberg
Recommended
Meet the 80-Year-Old Whiz Kid Reinventing the Corporate Bond Market
Merkel Expects Greek Funding Talks to Drag On for Months
I'll Be Back: The Return of Artificial Intelligence
Janet Yellen was sworn in as Fed chief exactly a year ago. And by almost any measure she had a great first year.
A year ago the unemployment rate was at 6.7%. As of the last jobs report, it's down to 5.6%.
A year ago the S&P was at 1741.89. Now it's over 2020 (not that she cares about that, necessarily).
It's true that inflation is below the Fed's target, though a major contributor to that is the collapse in global commodity prices, which is outside of the Fed's control, and also likely welcome news for the U.S. economy. (The Fed worries about falling inflation, since declining prices could discourage consumption and investment.)
But Yellen's most impressive accomplishments go beyond just the basic economic scoreboard.
"I think Yellen has done an excellent job in terms of economic stewardship," said Carl Ricadonna, an economist at Bloomberg, who gives Yellen an A for her first year. "Time and time again, some private sector economists have cried wolf with respect to an imminent flare-up of inflation pressures" because of the Fed's "quantitative easing," or bond-buying stimulus, program and other factors, "and this has never materialized. Chair Yellen has had a steady, deliberate approach to policy setting."
Yellen also made some tough policy decisions under trying circumstances
"She faced the difficult task of bringing quantitative easing to an end and setting the stage for the first rate hike without triggering unwanted market turmoil," said Tim Duy, an economist at the University of Oregon and the author of the blog Tim Duy's Fed Watch. "Moreover, she had to do so with a fairly contentious group of policymakers ranging across the hawk-dove spectrum. The successful guidance of the FOMC through this process, along with the gradual communication shifts in the post-meeting statements, was a clear success for Yellen in her first year as Fed chief. "
Yellen correctly read the data throughout the year. The most impressive call came in the spring of last year, when inflation started showing a pickup. Core CPI moved from 1.6% in February to nearly 2% by May, and lots of people on Wall Street started talking about how the Fed was behind the curve. Yellen didn't buy it, and indeed she was correct, as inflation has drifted steadily lower ever since then.
"She lets the data guide her decision making, but does not do so blindly. Her admonition to dismiss high inflation readings as 'noisy,' for instance, proved to be correct and highlighted her analytical skills," Duy wrote to Bloomberg.
So in her first year, Yellen has presided over impressive economic conditions, successfully transitioned away from QE, and ignored the inflation scare in the spring of 2014, while also ignoring all of the second guesses from private sector economists who said she was asleep at the wheel. What's more, she did all this without causing major financial market disruptions and with a sharply divided board. Not bad!
The test might get even harder this year.
Yellen will be challenged by the apparent contradiction between a solid recovery and flagging inflation, said Neil Dutta, an economist at Renaissance Macro. "I think 2015 will be far more difficult for the Fed's communication strategy. The economy is doing well, labor markets are tightening, bank lending is up and yet inflation is weak. Ironically, I think Yellen's job this year will be to help convince the markets that the fellow that she beat out to steer the Fed, Larry Summers, is wrong. The markets seem priced for secular stagnation. I don't think Yellen believes it."
Duy offered similar thoughts. "This upcoming year might be more of a challenge," he said. "Setting the stage for raising rates is not the same as actually raising them. Financial market participants are increasingly doubtful the Fed can carry through on its plans given the weak inflation data."
So year two is likely to be a challenge. In addition to the soft inflation data and falling long-term interest rates, the Fed is looking to raise rates at the same time as central banks around the world are loosening policy. The good news is that Yellen has shown excellent judgment so far.
Janet Yellen Just Completed a Great First Year. Year Two Will Be Harder
Don't Miss Out —
Follow us on:
Facebook Twitter Instagram Youtube
by Joseph Weisenthal
9:25 AM CST
February 3, 2015
Fed Chair Janet Yellen
Photographer: Andrew Harrer/Bloomberg
Recommended
Meet the 80-Year-Old Whiz Kid Reinventing the Corporate Bond Market Merkel Expects Greek Funding Talks to Drag On for Months I'll Be Back: The Return of Artificial Intelligence Janet Yellen was sworn in as Fed chief exactly a year ago. And by almost any measure she had a great first year.
A year ago the unemployment rate was at 6.7%. As of the last jobs report, it's down to 5.6%.
A year ago the S&P was at 1741.89. Now it's over 2020 (not that she cares about that, necessarily).
It's true that inflation is below the Fed's target, though a major contributor to that is the collapse in global commodity prices, which is outside of the Fed's control, and also likely welcome news for the U.S. economy. (The Fed worries about falling inflation, since declining prices could discourage consumption and investment.)
But Yellen's most impressive accomplishments go beyond just the basic economic scoreboard.
"I think Yellen has done an excellent job in terms of economic stewardship," said Carl Ricadonna, an economist at Bloomberg, who gives Yellen an A for her first year. "Time and time again, some private sector economists have cried wolf with respect to an imminent flare-up of inflation pressures" because of the Fed's "quantitative easing," or bond-buying stimulus, program and other factors, "and this has never materialized. Chair Yellen has had a steady, deliberate approach to policy setting."
Yellen also made some tough policy decisions under trying circumstances
"She faced the difficult task of bringing quantitative easing to an end and setting the stage for the first rate hike without triggering unwanted market turmoil," said Tim Duy, an economist at the University of Oregon and the author of the blog Tim Duy's Fed Watch. "Moreover, she had to do so with a fairly contentious group of policymakers ranging across the hawk-dove spectrum. The successful guidance of the FOMC through this process, along with the gradual communication shifts in the post-meeting statements, was a clear success for Yellen in her first year as Fed chief. "
Yellen correctly read the data throughout the year. The most impressive call came in the spring of last year, when inflation started showing a pickup. Core CPI moved from 1.6% in February to nearly 2% by May, and lots of people on Wall Street started talking about how the Fed was behind the curve. Yellen didn't buy it, and indeed she was correct, as inflation has drifted steadily lower ever since then.
"She lets the data guide her decision making, but does not do so blindly. Her admonition to dismiss high inflation readings as 'noisy,' for instance, proved to be correct and highlighted her analytical skills," Duy wrote to Bloomberg.
So in her first year, Yellen has presided over impressive economic conditions, successfully transitioned away from QE, and ignored the inflation scare in the spring of 2014, while also ignoring all of the second guesses from private sector economists who said she was asleep at the wheel. What's more, she did all this without causing major financial market disruptions and with a sharply divided board. Not bad!
The test might get even harder this year.
Yellen will be challenged by the apparent contradiction between a solid recovery and flagging inflation, said Neil Dutta, an economist at Renaissance Macro. "I think 2015 will be far more difficult for the Fed's communication strategy. The economy is doing well, labor markets are tightening, bank lending is up and yet inflation is weak. Ironically, I think Yellen's job this year will be to help convince the markets that the fellow that she beat out to steer the Fed, Larry Summers, is wrong. The markets seem priced for secular stagnation. I don't think Yellen believes it."
Duy offered similar thoughts. "This upcoming year might be more of a challenge," he said. "Setting the stage for raising rates is not the same as actually raising them. Financial market participants are increasingly doubtful the Fed can carry through on its plans given the weak inflation data."
So year two is likely to be a challenge. In addition to the soft inflation data and falling long-term interest rates, the Fed is looking to raise rates at the same time as central banks around the world are loosening policy. The good news is that Yellen has shown excellent judgment so far.
