What's the Yellen About at the Fed?

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U.S. markets took a downturn today following the release of its monthly monetary policy review findings and actions. The S&P 500 dropped off by 0.14% to 1,982.30. The Dow closed at 16,974.31, down .18%. The Nasdaq took the biggest hit at 4,549.23, down 0.33%.


Today’s report was not the end of the world as some seem to expect nearly every month, but it was the end to quantitative easing, indicating that Janet Yellen and her board are moving toward an exit strategy from its stimulus program.

That’s not going to happen just yet, however. The report stated that “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” Still, the direction in which the Fed is moving is fairly clear.

Whilst citing a gradual improvement in under-utilization of labor (a far more telling statistic than the published unemployment rate) and other market and survey-based measures of long-term inflation indicating a tendency toward stability, the only definitive action the board will take in the short term is to discontinue its asset purchase activity, with a vote of 9-1. The lone dissenter was Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis. The wording of the statement seemed to imply that she is not against ceasing the program so much as she is in continuing the asset purchase program in place “until the one-to-two-year ahead inflation outlook has returned to 2 percent.”

The Fed has purchased $3.5 trillion worth of bonds over the past six years, “far more than anybody inside or outside the Fed expected when this all began,” according to David Wessel at the Brookings Institution.

Whatever action the Fed takes will always be met with its fair share of criticism. While many are already applauding the decision, there is a good chance that this group is comprised of those who are either typically optimistic and who are longing just to hear that someone else is.

On the other hand, the pessimists are sounding ominous warnings. RT News quoted Barbara J. Cummings of Boston Private Bank & Trust as telling CNBC that “The market and the Fed are definitely saying two different things. The market is right. It usually is.

I guess we will just have to take a wait and see approach, just like we do at this time every month.

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