Translating Yellin: The FED’s Mistress of Fog

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by Gary North

Recently by Gary North: Ron Paul’s Farewell Address: An Anomaly in American History


Janet Yellin is Vice Chairman of the Federal Reserve’s Board of Governors.She has been assigned the task of making the FED more transparent. She is the chairman of a new Federal Open Market Committee (FOMC) communications subcommittee.

Let me say from the beginning that Janet Yellin makes Ben Bernanke sound like Henny Youngman.

Anyone who reads a Janet Yellin speech while smoking in bed is not a good insurance risk.

Her recent speech reveals new thinking at the FED. (I use the term “reveals” advisedly.) She gave this speech at the University of California, Berkeley, where she used to teach. (I use the term “teach” advisedly.)

As you may know, I am an unofficial translator of Federal Reserve speeches. I will help guide you through Dr. Yellin’s speech.

The FED relies on her to get its message across.

My subject is the recent revolution and continuing evolution in communication by central banks. All of us, of course, live in an era of revolutionary advances in communication: If I succeed in saying anything interesting this afternoon, those words may be posted, tweeted, and blogged about even before I’ve left this podium. So, it might seem unsurprising that the Federal Reserve, too, is bolstering its efforts at communication.

Translation: “The FED is communicating, all right. It just isn’t communicating anything of substance. If you doubt me, read the rest of my speech. See if you find anything interesting.”

But the revolution in central bank communication is not driven by technological advances. Rather, it is the product of advances in our understanding of how to make monetary policy most effective.

Translation: “Our previous understanding of how to make monetary policy effective was unfortunately weak. For example, Bernanke’s textbook doesn’t let anyone predict anything anymore.”

A growing body of research and experience demonstrates that clear communication is itself a vital tool for increasing the efficacy and reliability of monetary policy.

Translation: “Too bad nobody at the FED knows how to use this vital tool. Doubt me? Keep reading.”

In fact, the challenges facing our economy in the wake of the financial crisis have made clear communication more important than ever before.

Translation: “That’s why the FED’s lack of ‘transparency’ stands out like a sore thumb. I am here today to call this opaqueness ‘transparency.'”

Today I’ll discuss the revolution in thinking about central bank transparency and how, pushed by the unique situation precipitated by the financial crisis, the Federal Reserve has responded with fundamental advances in communication. Indeed, I hope that one of the legacies of this difficult period is a permanent and substantial advance in Federal Reserve transparency, building on the policies I’ll talk about shortly.

Translation: “Above all, we do not want an independent audit of the FED. I am here to try to deflect your attention from this obvious fact. When I say “transparency,’ think ‘No audit of the FED by the Government Accountability Office.'”

As you all know, the Federal Reserve is actively promoting a faster recovery. Our efforts are hampered by the fact that our standard policy tool, the federal funds rate, is near zero and cannot be reduced much further.

Translation: “As I said before, nothing is working the way Keynesian textbooks said it should.”

In this extraordinary environment, the Federal Reserve is employing two unconventional policy tools to spur job creation and growth: large-scale asset purchases, which some people call quantitative easing, and communications about the future course of monetary policy, also known as forward guidance.

Translation: “We are inflating as never before in peacetime, and we are also trying to plan the entire economy. When I say ‘forward guidance,’ think ‘plan the economy.'”

At the Federal Open Market Committee’s (FOMC) meeting in September, the FOMC – the Federal Reserve’s principal monetary policymaking body – employed both of these unconventional tools. The Committee initiated a new large-scale asset purchase program to buy mortgage-backed securities (MBS). In addition, with regard to forward guidance, the Committee said that, first, it intends to continue buying MBS and other assets until it sees a substantial improvement in the outlook for the labor market. Second, the Committee stated that it expects a highly accommodative stance of monetary policy to remain appropriate for a considerable time after the economic recovery strengthens. And third, the Committee noted that it currently expects to hold the federal funds rate at exceptionally low levels at least through mid-2015, about a half-year longer than previously announced.

Translation: “So far, there has been no quantitative easing. Yes, the FOMC announced its new policy on September 13. Since then, the adjusted monetary base is lower. At the FED, we honor the legacy of Attorney General John Mitchell, before he went to prison. ‘Watch what we do, not what we say.’ Here is what we have done. Of course, you rubes are not smart enough to look it up, so nobody is the wiser, except at the St. Louis FED, which is run by a bunch of wacko Friedmanites.”

The three elements of forward guidance that were adopted by the FOMC in September 2012 would have been unthinkable in 1992 and greatly surprising in 2002, but they have, in my view, become a centerpiece of appropriate monetary policy.

Translation: “Anyway, that’s the official Party Line. In fact, we are doing the opposite.”

To better explain my views regarding the FOMC’s forward guidance, I will first discuss how it fits into the Committee’s broader thinking and communication about monetary policy.

Translation: “Here comes the song and dance.”

The FOMC took a major step to explain this thinking last January when it issued for the first time a “Statement of Longer-Run Goals and Policy Strategy.” This statement provides a concise description of the FOMC’s objectives in conducting monetary policy and the approach the Committee considers appropriate to achieve them.

Translation: “And, one of these days, the FOMC may actually implement it. You never know.”

I will present my views on the implications of this statement for monetary policy in current circumstances. I will then discuss several approaches the FOMC has recently considered to enhance its communications to make its policy more effective in this challenging situation. Let me emphasize that the views I express here are my own and do not necessarily represent those of my colleagues in the Federal Reserve System.

Translation: “Sit back and relax. I will now tell you a story. It’s just my story. It’s not necessarily anyone else’s story.”

The Case for Central Bank Transparency

To fully appreciate the recent revolution in central bank communication and its implications for current policy, it is useful to recall that for decades, the conventional wisdom was that secrecy about the central bank’s goals and actions actually makes monetary policy more effective.

Translation: “Back then, we could keep out snoopers. Those were the good old days of central banking. Central bankers could mess with the economy, and no one was the wiser. No one said anything, except Ron Paul, and he lost his bid for re-election in 1976.”

In 1977, when I started my first job at the Federal Reserve Board as a staff economist in the Division of International Finance, it was an article of faith in central banking that secrecy about monetary policy decisions was the best policy: Central banks, as a rule, did not discuss these decisions, let alone their future policy intentions. While the Federal Reserve is required by the Congress to promote stable prices and maximum employment, Federal Reserve officials at that time avoided discussing how policy would be used to pursue both sides of this mandate. Indeed, mere mention of the employment side of the mandate, even by the mid-1990s, was described in a New York Times article as the equivalent of “sticking needles in the eyes of central bankers.”

Translation: “We could get away with murder back then, and we did. The FED was run by G. William Miller, who inflated the dollar into the worst post-war inflationary crisis in modern history.”

This secretiveness regarding monetary policy decisions clashed with the openness regarding government decisions expected in a democracy, especially since Federal Reserve decisions influence the lives of every American.

Translation: “Not only did we run the economy secretly, no college-level textbook said this was bad. They all cheered us on. They stood firm against all that democracy blather. By the way, no textbook brings this up these days, either. So, we are still running the show. Suck it up, rubes.”

And there were critics within the economics profession. James Tobin and Milton Friedman, both Nobel laureates, disagreed on almost every aspect of monetary policy, but they were united in arguing that transparency regarding central bank decisions is vital in a democracy to lend legitimacy to policy decisions.

Translation: “That was a cloud no larger than a man’s hand, to quote the Bible.”

Surely only some important societal interest requiring opacity could justify the traditional practice. Indeed, in 1975 a citizen demanding greater openness sued the FOMC to obtain immediate release of the policy directive upon its adoption, and in 1981 the case was resolved in favor of deferred disclosure.

Translation: “Before Miller screwed the pooch, we had it made.”

Ironically, while this transparency lawsuit was wending its way through the courts, Robert Lucas and others were publishing research that would garner several Nobel prizes and ultimately overturn the traditional wisdom that secrecy regarding policy actions was the best policy.

Translation: “Troublemakers.”

A key insight of these scholars was that monetary policy affects employment, incomes, and inflation to a large extent through its effects on the public’s expectations about future policy. Many spending decisions, such as financing the purchase of a home or businesses’ capital expenditures, depend on longer-term interest rates that are connected to monetary policy through expectations of short-term interest rates over the lifetime of a mortgage or an investment project.

Translation: “Public expectations about interest rates count. That was what Austrian School economists had been saying ever since 1912. But they did not have any formulas or higher math, so no respectable economist paid any attention. Those were the good old days.”

The history of oil price shocks is a good example to illustrate this point. In the 1970s, two large oil price shocks led to sharp increases in general inflation that were not met with prompt inflation-fighting actions by the Federal Reserve. This delay left the public unsure whether the Federal Reserve would act to reverse the increase in inflation, and expectations of longer-term inflation ratcheted up.

Translation: “Miller.”

When the Federal Reserve eventually did act to bring inflation down from double-digit levels, the consequence was the painful recession of 1981 and 1982.

Translation: “Volcker.”

Thus, over the quarter century up to the mid-2000s, the Federal Reserve established a record of policymaking that allowed the public to predict monetary policy responses to unforeseen events such as an oil price shock with reasonable accuracy.

Translation: “I like to talk about oil. I prefer not to talk about Greenspan’s housing bubble. You can understand why.”

Unfortunately, recent events have made it harder for the public to predict the future course of monetary policy. Economic weakness since the financial crisis and the Great Recession has confounded hopes for a speedy recovery and has required unprecedented monetary policy actions. Shortly after the financial crisis erupted, the Federal Reserve reduced the federal funds rate to almost zero and launched a number of temporary liquidity and credit programs to keep the financial system operating. Even these aggressive policy responses, however, were not enough to halt the contraction, and further action was needed to stop the economy from falling into a second Great Depression.

Translation: “The Austrian economists saw this coming, and said so. Boy, are they lucky guessers! A stopped clock is right twice a day.”

To this end, the Federal Reserve started to expand its balance sheet through purchases of longer-term Treasury securities and agency debt and MBS in an effort to put further downward pressure on long-term interest rates and so stimulate the economy.

Translation: “Rates went down. The economy barely went up. As I said, nothing is working as planned anymore.”

With the federal funds rate near zero, and the Federal Reserve deploying the new tool of large-scale asset purchases, it became much more difficult for the public to anticipate how the FOMC would likely conduct policy over time, and how the overall stance of monetary policy would both affect and respond to economic conditions.

Translation: “It was difficult for the public to anticipate the FOMC mainly because nobody at the FOMC could figure out what the FOMC would do next.”

In this situation, the FOMC began to rely heavily on forward guidance about both the likely future path of the federal funds rate and the Committee’s intentions concerning asset purchases and sales.

Translation: “‘Forward guidance’ means central planning through monetary manipulation.”

But, for this guidance to have its maximum effect, it must be understood and believed by the public, and therefore provide the public with a solid basis for forming their borrowing and spending decisions today. In my view, such credibility can be achieved only if the public understands the FOMC’s objectives and intentions.

Translation: “If people would just believe us, maybe the policies would work. So far, nothing is working as planned.”

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Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 31-volume series, An Economic Commentary on the Bible.

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