Now that Atlanta Fed president Dennis Lockhart has been thoroughly discredited with his “sufficient momentum to hike as soon as April” thesis, Fed Chair Janet Yellen is on board with slower hikes.

In a speech today to the Economic Club of New York on The Outlook, Uncertainty, and Monetary Policy, Yellen stressed the need to go slow, specifically citing “other tools” if rates were to drop to zero again.

Yellen’s long-winded speech is not worth a read. Bloomberg did a respectable job of condensing it down to a few appropriate sound bites, but as is typical, Bloomberg never linked to the source as I did above.

Recall that in December and January, Yellen trumped up the case for four hikes this year. Today Yellen says Caution in Raising Rates Is ‘Especially Warranted’.

From Bloomberg …

Federal Reserve Chair Janet Yellen said it is appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks.

The speech to the Economic Club of New York made a strong case for running the economy hot to push away from the zero boundary for the Federal Open Market Committee’s target rate.

“I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said in the text of prepared remarks Tuesday. “This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”

Yellen said the FOMC “would still have considerable scope” to ease policy if rates hit zero again, pointing to forward guidance on interest rates and increases in the “size or duration of our holdings of long-term securities.”
Other Tools

“While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed,” she said.

More QE

“Other tools” are nothing more than forward guidance and a return to QE.

Forward guidance is useless as noted by the continual central bank rants about inflation targets. The Fed, Bank of Japan, and ECB have all given useless forward guidance on inflation.

Yellen was reluctant to use the word “QE” but that is precisely what “increases in the size or duration of our holdings of long-term securities” means.

Yellen noted the risks and costs of more QE but “would do so again if needed.”

Lockhart in Review – GDPNow – March 28

GDPnow 2016-03-28

The above chart and further analysis from GDPNow Forecast Plunges to +0.6%; Tracking Lockhart’s Momentum with Pictures.

No Evidence QE Boosted Economy

Does QE boost the economy as Yellen stated?

If you think so, you may wish to consider St. Louis Fed official: “No evidence QE boosted economy”.

Lacy Hunt at Hoisington Management agrees.

  1. January 30, 2016: Lacy Hunt – “Inflation and 10-Year Treasury Yield Headed Lower”
  2. February 4, 2016: Lacy Hunt: Secular Low in Long-Term Treasury Bond Yields Remains Ahead.

From link number 1 above: “In essence the way in which it worked was by signaling that real assets were inferior to financial assets. The Fed, by going into an untested program of QE effectively ended up making things worse off,” said Hunt.

At best, the Fed temporarily shifted some demand forward by inflating financial assets.

In the process, the Fed created asset bubbles in equities and junk bonds, stimulated oil production via cheap financing to the point of a bust, and exacerbated problems of income inequality.

QE wasn’t worth the problems it created. But the Fed is prepared for more of it.

Mike “Mish” Shedlock