Confusion from the Fed

Date posted: April 22, 2014

New Fed Chair Janet Yellen recently held her first press conference. She was asked about rules or statistics the Fed would use to make decisions about changing interest rates. Some say Chairperson Yellen’s answer created more confusion than clarity, says host Mary Walden, who asks her husband, N.C. State University economist Mike Walden, “What happened?”

Mike Walden: “Previous Fed Chairman Bernanke had stated publicly a very simple rule. He said that once the national unemployment rate reached 6.5 percent, that would be a sign to the Federal Reserve that the economy was strong enough that the Federal Reserve could start to withdraw its stimulus for the economy. Of course that stimulus has come in two forms: One, the Federal Reserve keeping interest rates very, very low, and, two, the Federal Reserve printing money, using that money to augment the reserves at banks, as well as to buy financial assets like mortgages. In her first press conference Chair Yellen threw out that rule.  She said that, no, the Fed’s no longer going to use that 6.5 percent as a guideline.  They’re going to look at lots of statistics.  She didn’t think that 6.5 was necessarily the best statistic, that the Federal Reserve will kind of make it up as they go along. And she got a lot of criticism, a ton of criticism for that, because critics said, “Hey the Fed is now creating uncertainty. We don’t have as good of a sense of where Fed policy will be in the future.”  However, there are others who say this is exactly what the Federal Reserve should do. In fact, former Fed Chairman Greenspan long said that the Federal Reserve best operated when it surprised the economy, when the economy didn’t know what the Fed would be doing. Don’t know if that’s what Chair Yellen had in mind, but I think we are in a new era here in terms of interpreting the future policies of the Federal Reserve.”

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