The Law Of 2%

It would be preferable, of course, if what Janet Yellen said in any setting made little noise whatsoever. We aren’t nearly there yet, but are moving in that direction. Her testimony today before Congress in the Fed’s semi-annual Humphrey-Hawkins kabuki relic might actually help in that matter.

If economists like Yellen were caught so unprepared for what happened after 2014 because of their view of what was happening in 2014, that wasn’t supposed to be the case in 2017. This partly is the fault of policymakers who stoked expectations or at least failed to clarify what “rate hikes” actually mean in the post-“rising dollar” context. It simply does not represent what it would have had things gone the way they were supposed to just a few years ago.

Instead, almost a year and a half from the trough of what was a serious global downturn, and now three years after its initiation, Yellen manages to deliver this pearl of wisdom:

I see roughly equal odds that the U.S. economy’s performance will be somewhat stronger or somewhat less strong than we currently project…

Thanks for clearing that up, professor. The media and the mainstream continue to frame monetary policy as a choice between hawkishness and dovishness; continued accommodation or its determined removal. This is the wrong way of contemplating what are going to be serious (psychological) changes.

It starts with the state of monetary policy itself. As I wrote before in describing the true meaning of Humphrey-Hawkins, it relates to the evolution of money:

Twice a year every year, the Chairman of the Federal Reserve drives up to Capitol Hill and formally reports to Congress. Given our current circumstances, these ceremonial affairs are lent a great deal of mainstream scrutiny as the public tries to parse the smallest scraps of unanticipated deviations from the carefully laid script. In many ways, this is a rerun of the late 1990’s dot-com bubble, but in reverse. When Alan Greenspan would testify, even his briefcase would be subjected not to so much scrutiny but reverence for what the Fed would not have to do…Janet Yellen testifies, the world waits with baited breath for her to endorse instead the smallest little something that the Fed might have got right.