Yesterday, Janet Yellen surprised markets again, when after weeks of a hawkish setup, she suggested that the Fed is not only uncertain “about when – and how much – inflation will respond to tightening resource utilization’, warning that the federal funds rate may “not have to rise all that much further to get to a neutral policy stance.” The market was delighted by this dovish turn, and sent the DJIA to new all time highs, while global stocks hit fresh record highs.
Now it’s time for day two, with Yellen appearing before the Senate Banking Committee. While the prepared remarks will be identical, in her speech on Wednesday, Yellen said the U. S. economy should continue to expand over next few years and stressed a gradual approach to tightening as central bank monitors inflation. The attention will be on the Q&A.
And, to help the Senate along, here are 3 questions that the Senate should ask Yellen, courtesy of Rafiki Capital’s Steven Englander.
If GDP, unemployment, consumption etc were exactly the same but inflation was stable at 2%, would the US be better or worse off?
Ask 100 people and 95 would say we are better off at 2% inflation, but being able too expand further without hitting output constraints is better than finding that you have topped out on the growth side. Imagine if we had hit 2% inflation when the unemployment rate was 6%, would we or the Fed be high fiving because we hit our targets? Below target inflation is a problem for the Fed in missing its dual mandates but it means that the economy has more room to grow, more jobs to create, more homes to build etc. However, having more room to expand is unambiguously a good thing from the economic viewpoint -with the caveat that if we are using the wrong tools and we generate asset market instability, there is a case to the contrary. But that is different than saying the new millennium would be here if there was 2% inflation rather than 1.5%, but everything else was the same.
This post was published at Zero Hedge on Jul 13, 2017.