How to reconcile these two recent comments from Janet Yellen?
‘Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.’ (2 July)
‘While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched’ (15 July)
In the first, she argues for cleaning up bubbles afterwards, rather than leaning into them [previously covered here: http://blondemoney.co.uk/2014/07/yellen-cleans-not-leans/]. So why bother in her recent testimony even to try to identify them ahead of time? She just said it wasn’t critical….?
- The Fed has a new role for financial stability, and is figuring out how to handle that new responsibility. Who would want to cause another crisis so soon after the last one?
- The testimony presented the view of the Committee, not just of Janet herself. We know that cracks in the lower-for-longer consensus are emerging on the FOMC, not least because of concerns over the unsustainability of the accompanying lower-for-longer-levels of volatility!
Why does this matter?
It leaves the Fed looking schizophrenic. Either they really are worried about the spillover effects of leaving policy too easy for too long, and try to do something about it; or they consider it something that can be cleaned up afterwards, when the real economy is booming.
To reconcile this puzzle, the key focus remains wage inflation. Only when that turns higher does it appear that Janet will relax enough to take the foot off the free money accelerator.
In July 15th’s Monetary Policy Report, that time is still some far away, it would seem, as this chart demonstrates.wages US