I suppose it would have been out of character or asking too much to expect Janet Yellen’s Federal Reserve, at her last meeting as Fed chair, to act decisively and do something that needed to be done. Instead, playing to form, The Fed elected not to raise the federal funds rate at its January monetary policy meeting. Now we will have to wait another two months, March 20-21, the Fed’s next meeting, for the central bank to get back to normalizing interest rates.
For most of the past four years, the Yellen-led Fed has preferred to sit on its hands and let asset bubbles get bigger and bigger and leave interest rates pretty much alone, even in the face of a burgeoning economy. Instead, it has let its obsession with inflation – it’s too low, in their view, not too high – dictate monetary policy, whether that fixation has a basis in fact or not.
Since the beginning of last September, the yield on the benchmark 10-year Treasury note has soared about 75 basis points, from just over 2.00% to more than 2.75% at its most recent peak, putting it at its highest level in nearly four years. The yield on the two-year note, which is more susceptible to changes in short-term interest rate changes, is up about 90 bps in that time, to about 2.15%.
One of the main reasons for that, of course, is the strengthening economy, which even the Fed acknowledged in its post-meeting announcement. “The labor market has continued to strengthen, and economic activity has been rising at a solid rate,” the announcement said. “Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low.”
Yet the Fed in its wisdom elected – unanimously, I might add – to just leave things alone. Why? Because of its old bugaboo over inflation.
“On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2%,” it said. “Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”
One of the reasons for its obsession with inflation can be found in its revised “Statement on Longer-Run Goals and Monetary Policy Strategy,” which it also released last week. One sentence in that statement really struck me: “The inflation rate over the longer run is primarily determined by monetary policy (emphasis added), and hence the Committee has the ability to specify a longer-run goal for inflation.”
Maybe it’s me, but that sentence sounds like the height of arrogance, but I guess we should give the Fed some credit for admitting that it thinks it can “determine” inflation. If that’s the case, why has it taken so long to actually get to the figure – 2% – that it’s trying to achieve?
Yet, later on in the one-page statement, the Fed also says, “The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment.”
But isn’t that also true about inflation? How can the Fed possibly think it can “determine” what it considers to be the proper level of inflation – which we’ve seen over the past several years it can’t do – but admits it can’t do the same for the unemployment rate?
Of course, this gives the academic-led Fed license and cover not to do anything even when the situation clearly warrants it.
By the Fed’s next meeting, scheduled for March 20-21, Jerome Powell will have succeeded Yellen as Fed chair. Yes, Powell went along with the rest of his colleagues on the central bank in voting to leave rates unchanged last month, but let’s hope he can instill some common sense into the rest of the committee. A mere banker by training with decades of real-life experience in business and government, not at a university, Powell hopefully will have a clearer picture of what needs to be done and start normalizing monetary policy in order to get the markets and the economy on a more solid footing for sustainable growth.
No doubt Janet Yellen’s legacy in her four years as Fed chair will be as a prudent steward of America’s economy and financial markets, how her easy hand guided the country through some troubled times. But sometimes action is called for, a quality she never showed she has. Let’s not mistake an unwillingness to act for prudence.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.