Janet Yellen’s Speech at Jackson Hole: Why You Should Care

Federal Reserve Chair Janet Yellen’s highly-anticipated speech Friday to a gathering of the country’s monetary policy brain-trust paints the picture of a central bank that seems primed to raise interest rates in the near future. You know, so long as they are really, really, really sure the time is right.

A public address by the head of the U.S. central bank is commonplace, but the location is what gives it added significance. Hosted by the Kansas City Fed every year since 1978, the Jackson Hole Economic Symposium is attended by central bankers, economists, and bankers from around the world.

A location supposedly chosen due to then-Fed Chairman Paul Volcker’s love of fly-fishing, it has served as a stage for previous Fed chiefs to signal the direction of monetary policy in the coming months.

It was at this gathering in 2012 that Yellen’s predecessor, Ben Bernanke, hinted at a third round of large-scale asset purchases — more commonly referred to as “QE3” — a $40 billion monthly program that was unveiled the following month.

So what did Yellen have to say this time about the future path, both near-term and beyond, of monetary policy?

The Short-Term Outlook

“… in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.

Translation: The Fed shifted away from its zero interest rate policy at the end of 2015 but has been on hold since then, on guard to see if events abroad conspire to knock the U.S. economic recovery off its course. But with job gains averaging 190,000 over the past three months, there appears to be growing confidence among Fed officials that the economy can handle another increase in short-term interest rates.

The question remains if the Fed will act at its upcoming policy meeting in September, or choose to avoid any undue attention by waiting until December — after the U.S. presidential elections — to make a move.

“ ….as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy.”

Translation: The Fed’s forecasts have been wrong before, so Yellen and her colleagues will remain cautious and leave themselves room to change course if necessary.

The Long-Term Outlook

“ Looking ahead, we will likely need to retain many of the monetary policy tools that were developed to promote recovery from the crisis.”

Translation: Yellen, just like Bernanke before her, believes the Fed’s large-scale asset purchases played a major role in getting the U.S. economy back on track following the 2008 financial crisis. So despite the program’s widespread unpopularity, it is now a permanent feature in the Fed’s crisis response armory.

I expect that forward guidance and asset purchases will remain important components of the Fed’s policy toolkit.”

Translation: QE is here to stay, just in case her earlier comments were not clear.

“ Beyond monetary policy, fiscal policy has traditionally played an important role in dealing with severe economic downturns. A wide range of possible fiscal policy tools and approaches could enhance the cyclical stability of the economy.”

Translation: Congress needs to get its act together. Fed officials have to tread carefully when it comes to providing unsolicited advice to Congress, but it is no secret that many feel the U.S. economy would be in a much better position right now if the Fed’s efforts are backed up by forceful action from Capitol Hill.

So in summary, the U.S. economy continues to offer up evidence it can handle a rate increase in 2016, but will the Fed actually shake its timid reputation and actually do something? Watch this space.