Friday, March 27, 2015


Today, Fed Res chairman, Janet Yellen gave a speech at the The New Normal Monetary Policy conference sponsored by the Federal Reserve Bank of San Francisco, San Francisco, California. Like her predecessors, Yellen speaks in an obtuse, truly meaningless language that needs to be decoded for anyone to gain meaning.

Luckily for you, I have done that. Here are the key parts decoded for you.

Janet Yellen said: With continued improvement in economic conditions, an increase in the target range for that rate [interbank lending rate] may well be warranted later this year.

What Yellen means: As Fed Res bankers, we decide how to set the Fed funds rate based on measures of profitability for the key banks that comprise the majority of commercial banking sales of the Federal Reserve System.

Janet Yellen said: We'll increase funds rate and its subsequent path will be determined by the Committee in light of incoming data on labor market conditions, inflation, and other aspects of the current expansion.

What Yellen means: We'll increase the FFR based on banking sales expansion and for no other reason.

Janet Yellen said: I will also discuss why most of my colleagues and I believe the return of the federal funds rate to a more normal level is likely to be gradual.

What Yellen means: The current FFR remains at an abnormal level. It is going to take a long time to restore the FFR to a normal level.

Janet Yellen said:  The Committee is now giving serious consideration to beginning to reduce later this year some of the extraordinary monetary policy accommodation currently in place.

What Yellen means: We're going to continue quantative easing (buying securities, mostly those from Congress), but perhaps not buy as much as we do now.

Janet Yellen said: Of course, we still have some way to go to reach our maximum employment goal.

What Yellen means: As bankers, we're not concerned if millions never get jobs. We seek to have enough employment to expand sales of banking products of our member bankers of the Federal Reserve System.

Janet Yellen said: The unemployment rate has not yet declined to the 5.0 to 5.2 percent range that most FOMC participants now consider to be normal in the longer run.

What Yellen means: We're trying to psy-op you into believing that a 5.2% unemployment rate, which means the ratio of those who looked for work in the last four weeks to the sum of those aforementioned with those who have jobs.

Janet Yellen said: But I think we can all agree that the recovery in the labor market has been substantial.

What Yellen means: It looks like there are enough people working for our bankers to offer more credit.

Janet Yellen said: I am cautiously optimistic that, in the context of moderate growth in aggregate output and spending, labor market conditions are likely to improve further in coming months. 

What Yellen means: I hope things better but we are not making our plans based on that.

Janet Yellen said: I think consumer spending is likely to expand at a good clip this year given such robust fundamentals as strong employment gains, boosts to real incomes from lower energy prices, continued increases in household wealth, and a relatively high level of consumer confidence.

What Yellen means: If gasoline prices remain low, this will free up discretionary spending from those who buy gasoline now.

Janet Yellen said: But overall, I anticipate that real gross domestic product is likely to expand somewhat faster than its potential in coming quarters, thereby promoting further gains in employment and declines in the unemployment rate.

What Yellen means: I hope that real GDP grows even though there is little potential for it.

Janet Yellen said: In assessing the actual strength of the labor market and the broader economy, we must bear in mind that these very welcome improvements have been achieved in the context of extraordinary monetary accommodation. 

What Yellen means: Without quantitative easing, the economy would be far worse than it already is.

Janet Yellen said: While the overall level of real activity now appears to be much closer to its potential than it was a year or two ago, the economy in an "underlying" sense remains quite weak by historical standards, for the simple reason that the increases in hiring and output that have been achieved thus far have required exceptionally low levels of short- and longer-term interest rates, reflecting a highly accommodative stance of monetary policy.

What Yellen means: The true potential of the economy is quite low. So, real sales are matching that quite low potential. The economy is in bad shape. It's weak. We know it. Don't you?

Janet Yellen said: Interest rates have been, and remain, very low, and if underlying conditions had truly returned to normal, the economy should be booming.

What Yellen means: If this economy were legit, we would have boom times give dollar strength and low oil prices. But because the economy isn't legit, we continue with quantitative easing and these horribly written speeches that I must deliver in public to convince you otherwise.

Janet Yellen said: Inflation as measured by the price index for personal consumption expenditures has been running below the FOMC's longer-run goal of 2 percent for a number of years, and on a 12-month basis is currently 1/4 percent. Some of the weakness in inflation likely reflects continuing slack in labor and product markets.

What Yellen means: Our bankers aren't selling enough credit instruments because many Americans who could work aren't working. Lacking income, they can't service debt if credit were offered to them.

Janet Yellen said: On balance, I therefore think it is appropriate for monetary policy to remain accommodative for some time, fostering an environment of tightening labor and product markets that, together with stable inflation expectations, will help move inflation up to 2 percent over the medium term.

What Yellen means: We're going to keep with quantitative easing until enough start ups cause serious competition to existing sellers of products. We hope that happens and  if it does, real hiring will happen and the economy will go back to normal. Besides, we don't have any other plan. We don't know what to do otherwise.

Janet Yellen said: The Committee's decision about when to begin reducing accommodation will depend importantly on how economic conditions actually evolve over time. Like most of my FOMC colleagues, I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year. 

What Yellen means: The economy is still a wreck. And if I say I expect maybe we could raise the FFR, it appears to you that we're in charge and everything is under control.

Janet Yellen said:  The near-zero setting for the federal funds rate has facilitated a sizable reduction in labor market slack over the past two years and appears to be consistent with further substantial gains. A modest increase in the federal funds rate would be highly unlikely to halt this progress, although such an increase might slow its pace somewhat.

What Yellen means: We're afraid if we were to raise the FFR, no hiring would arise.

Janet Yellen said: That said, we must be reasonably confident at the time of the first rate increase that inflation will move up over time to our 2 percent objective, and that such an action will not impede continued solid growth in employment and output.

What Yellen means: We're not raising the FFR until our bankers growth of credit products increases.

Janet Yellen said: A substantial body of theory, informed by considerable historical evidence, suggests that inflation will eventually begin to rise as resource utilization continues to tighten.

What Yellen means: Business execs will seek credit to outbid competitors for commodities when enough firms have entered markets. When that happens, our bankers shall be selling banking products at the rate we seek.

Janet Yellen said: With respect to wages, I anticipate that real wage gains for American workers are likely to pick up to a rate more in line with trend labor productivity growth as employment settles in at its maximum sustainable level.

What Yellen means: Employers won't pay higher wages until they buy and put to use more capital.

Janet Yellen said:  But the outlook for wages is highly uncertain even if price inflation does move back to 2 percent and labor market conditions continue to improve as projected. For example, we cannot be sure about the future pace of productivity growth; nor can we be sure about other factors, such as global competition, the nature of technological change, and trends in unionization, that may also influence the pace of real wage growth over time. These factors, which are outside of the Federal Reserve's control, likely explain why real wages have failed to keep pace with productivity growth for at least the past 15 years. 

What Yellen means: We don't care if Americans see an increase in real wages.  We care only if there is enough working with discretionary income to buy banking products.

Janet Yellen said:  I have argued that a pickup in neither wage nor price inflation is indispensable for me to achieve reasonable confidence that inflation will move back to 2 percent over time.

What Yellen means: Our bankers will sell products at the rate we want, eventually.

Janet Yellen said: That said, I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably.

What Yellen means: We're keeping the FFR where we want it, anytime.

Janet Yellen said:  But the prescription offered by the Taylor rule changes significantly if one instead assumes, as I do, that appreciable slack still remains in the labor market, and that the economy's equilibrium real federal funds rate--that is, the real rate consistent with the economy achieving maximum employment and price stability over the medium term--is currently quite low by historical standards.

What Yellen means: We're keeping the FFR where we want it, anytime, and by that, we mean we're continuing with quantitative easing for awhile yet.

Janet Yellen said:  Under assumptions that I consider more realistic under present circumstances, the same rules call for the federal funds rate to be close to zero.

What Yellen means: As of now, there will be no change to the FFR. It's staying near zero.

Janet Yellen said:  The FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase. 

What Yellen means: We're going to talk about raising rates, endlessly talk about it. But when we do, it's not the first rate increase that you should care about, but the last one, because the last one means the economy shall be in recession again after a recovery. However, we're far from having any recovery.

Janet Yellen said:  the Committee's decisions will be data dependent, reflecting evolving judgments concerning the implications of incoming information for the economic outlook. We cannot be certain about the underlying strength of the expansion, the maximum level of employment consistent with price stability, or the longer-run level of interest rates consistent with maximum employment. Policy must adjust as our understanding of these factors changes.

What Yellen means: We will raise the FFR when we see the necessary, legit improvement in the economy.

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