There is arguably no more powerful job in the world than Chair of the Federal Reserve. When Janet Yellen took the gig in February, it was only natural for a lot of words to be written wondering what kind of leader she would be. Betting money was on more of the same, given her long tenure at the bank.
With her first press conference behind her, we do indeed have more – of the same, yes, but so much more it’s not the same. Yellen brought forward a new transparency so open that it makes the breath of fresh air that as Bernanke rather stale in comparison. Perhaps it was time for a woman, after all, as Yellen is following in the developing tradition of female leaders as no-nonsense reformers.
Sad that the market is built on nonsense, then. The reaction so far has not exactly been good.
Alan Greenspan famously said, “Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.” His tenure at the helm of the world’s most powerful bank was marked by lengthy ways of saying as little as possible, even having an aide keep a live chart of the stock market handy during his testimony so that any strong movements could be countered to nothing. It was the gold standard for being a Fed Chair, and the markets loved it.
Bernanke was always much more open about the internal debate on Fed policy, even encouraging governors who disagreed with him to speak openly. His tenure was rocky, but his hand was generally firm on the tiller. Markets learned to love Ben, especially as he pumped money into the economy at an unprecedented rate.
Yellen, for her part, opened up even further in her first press conference on 19 March. The “taper” of $85B per month in mortgage backed bonds since August 2012, down to $75B in January and $65B in February, will continue – and be done in six months. After that, expect interest rates to rise. But that wasn’t the most direct and open thing that came out of this remarkable press conference. Yellen directly told us all what is on her “dashboard” to measure economic recovery. The items are the ones Barataria and just about everyone figured all along, except for one interesting addition:
U6 – the broadest measure of unemployment, it stands at 12.6% – much higher than the 6.5% headline rate (U3). It’s come down a lot since its peak of 17.4%, but it unacceptably high.
Long Term Unemployment – “The share of long term unemployment has been immensely high and can be very stubborn in bringing down. That is something I watch closely. Again, that remains exceptionally high. But, it has come down from something like 45 percent ‐‐ high 30’s ‐‐ but that’s certainly in my dashboard.”
Workforce Participation – “I do think most research suggests due to demographic factors, labor force participation will be coming down and there has been a downward trend now for a number of years. But, I think there is a cyclical component in the fact labor force participation is depressed. And so it may be that as the economy begins to strengthen, we could see labor force participation flatten out for a time as discouraged workers start moving back into the labor market, and so that’s something I’m watching closely, and the committee will have to watch.”
Quit Rates – This is the surprise. “ I take the quit rate in many ways as a sign of the health of the economy. When workers are scared they won’t be able to get other jobs, they show a reduced willingness to quit their jobs. Quit rates now are below normal pre‐recession levels.” In other words, we will know the economy is healthy when people are leaving their jobs (!).
Wage Growth – “With productivity growth, we have, and two percent inflation, one would probably expect to see on an ongoing basis something between perhaps three and four percent wage inflation would be normal. Wage inflation has been running at two percent.”
These five items give us a new insight into what Yellen is looking for. The market reaction to this remarkable openness? The DJIA fell 200 points, recovering 100 of them the next day amid jitters. It’s not exactly being well received, but change rarely is.
Then again, part of what Yellen is doing along with this new openness is just what Alan Greenspan said is the job of a Fed Chair – “taking away the punch bowl just when the party gets started.” Perhaps it’s not all that new. But so far, Yellen sure is refreshing. Let’s home the market gets used to it – and, perhaps, gets a little of that no-nonsense religion, too.