Yellen shows Carney how to wriggle out of forward guidance like a pro
Bank of England governor Mark Carney must be one of the world’s luckiest central bankers – as he began his job, the stagnant UK economy suddenly kicked off, and inflation returned to two per cent after spending five years above target.
And when he does come up against a major challenge, another central banker gives him all the advice he needs a day in advance.
Today Janet Yellen gives testimony to Congress, and continues to slowly to squeeze the Federal Reserve out of the unemployment-based threshold it set up at the end of 2012. Since Carney will likely try to do in tomorrow’s Inflation Report, we hope he’s taking notes.
Some months ago the Fed began using this language, which is repeated in Yellen’s statement:
It likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal
This has effectively moved guidance from a rules-based system to a word-definition based system.
No one can be exactly sure how many months “well past” constitutes, and as such the terms allow Fed policymakers far more discretion. Bank-watchers should take note of similar malleable phrases in tomorrow’s inflation report.
Yellen also throws a few more tacit indicators into the mix today:
The unemployment rate is still well above levels that Federal Open Market Committee (FOMC) participants estimate is consistent with maximum sustainable employment. Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high. These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.
These are exactly the sort of things Carney may choose to look at, along with poor productivity growth and falling real wages.
Reaching for a wider range of indicators and stressing the qualitative weaknesses in the labour force may prove the safest option for the governor, given how quickly his fingers were burned with a more obviously rule-based policy.