Chair Yellen – Very Impressive

At lunchtime yesterday, I was fortunate to hear Chair Janet Yellen speak at the Economic Club of New York.

Much is in the paper about her talk and I have seen quite a few posts on the internet.  I am not a Federal Reserve (Fed) commentator by any standard, but I did want to at least share a few thoughts.

In the past, I have heard other top financial leaders speak at forums such as the Economic Club of New York (Bernanke, Paulson, Lagarde, etc.).  Often, speeches are very formal and the answers to questions are bland.  This was not the case yesterday.

Chair Yellen was direct and clear.  The Chair said that the Federal Reserve feels that they might reach their employment and interest rate targets in two years, and if so they will be ready with the tools necessary to take appropriate action.  Then, in a moment that got a laugh from a pretty serious audience, the Chair said, “Of course, if the economy obediently followed our forecasts, the job of central bankers would be a lot easier and their speeches would be a lot shorter.”

I have seen some pieces on the web suggesting that the Chair was a little more hawkish than anticipated.  I think the Chair was balanced.  She said the Fed feels that much still needs to be monitored in terms of evaluating factors that might push the recovery off track, and that the Fed remains concerned about slack in the labor market and low inflation.

To me, the most impressive moments of the presentation came during the question and answer session.

Questions came from Abby Cohen, the Senior U.S. strategist at Goldman Sachs, and Martin Feldstein, the George F. Baker Professor of Economics at Harvard University and president emeritus of the National Bureau of Economic Research.

Cohen started the questions and addressed Yellen twice as Madam Chair.  The Chair was open in her answers and did not shy away from making comments to Cohen that some might consider a little political.  She talked of her concerns about inequality in the labor force and the need for more education and training to close skill and income gaps.

Feldstein’s approach was quite different.  I do not remember him addressing Yellen as Chair at all and, in a baseball metaphor, others at my table joked that he seemed to test her by immediately throwing a high fast one inside.  Feldstein asked her a very pointed question that showed his concern about the potential for rising inflation and worry that the Fed was not prepared to take strong action.  She did not step away from the plate at all. The Chair paused, put on her glasses for the first and only time during the lunch, and very directly let Feldstein know that the Fed would be diligent in monitoring employment and inflation, had the tools to take action, and would take steps in a decisive manner when needed.  Yellen then firmly stated that the Fed currently feels that the “risk of not hitting our inflation target is greater than the risk of exceeding it.”  She then took off her glasses and received a spontaneous, and in my experience rare, mid-presentation round of applause.

The economy is not out of the woods yet as it relates to what the Chair stated could be structural employment issues.  I also worry that inflation is too low, and I hope that the economy hits the 2% Fed inflation target sooner vs. later.

I certainly do not have a crystal ball on what will come next in the market, but I think the Chair made it clear that the Fed will continue to be relatively accommodative for some time to come.  The market seems to parse every word from a Fed official carefully though, and some might interpret them differently.

Even though valuations could be relatively high among equities, I think risk assets will continue to benefit from low rates for some time to come, and that true long-term investors will be rewarded for sticking to long-term equity targets and investment plans (please notice that I said long-term twice – I feel too many react to every Fed comment like short-term speculators).

Again, I am not trying to be a Fed tea leaf reader and do not plan to be in the future.

More than any forecast about rates or markets, I hope others are impressed with and have confidence in the Chair.  I certainly do.


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