While Janet Yellen’s testimony will be uneventful, with her toeing the party line, and the fluff Q&A largely priced in – although everyone is eagerly looking forward to the Maxine Waters grilling – far more interesting in today’s Monetary Policy and State of the Economy hearing, will be the Part 2, where various experts (full list here), mostly hawks as it would appear, will provide their rebuttals to Yellen’s views. None of them is more anticipated than John Taylor – the Stanford economist whose “rule” the Fed uses, even though Taylor himself has largely disavowed the implications of the Taylor rule under current “extraordinary” conditions and has become one of the most vocal opponents of the Fed’s unconventional policy. The punchline from his prepared remarks: “there is little evidence that the policy has helped economic growth or job growth. Growth has been less with the unconventional policies than the Fed originally forecast.” Or precisely what we have been saying for about 5 years.
Here are the rest of the key speech excerpts:.
While the unemployment rate has declined recently, much of the decline is due to an unusually large number of people dropping out of the labor force because of the weak recovery. It is good news that the inflation rate has averaged very close to the Fed’s 2 percent goal during the past decade, but by any measure the performance of the real economy has deteriorated compared to the previous two decades.
I have argued that the main cause of the poor performance is a significant shift in economic policy away from what worked reasonably well in the decades before. Broadly speaking, monetary policy, regulatory policy, and fiscal policy each became more discretionary, more interventionist, and less predictable starting in the years leading up to the financial crisis and have largely remained in that mode.
Many researchers have shown that the federal funds rate was unusually low during this 2003-2005 period compared with the Taylor rule (1993), which described monetary policy in the previous two decades, and that this deviation exacerbated the housing boom or encouraged risk taking, and eventually led to the housing bust and defaults, leaving risky assets on the balance sheets of many financial institutions. The financial crisis followed.
Though the intention of the majority of those at the Fed in favor of the policies was to stimulate the economy, there is little evidence that the policy has helped economic growth or job growth. Growth has been less with the unconventional policies than the Fed originally forecast. In the year since QE3 gained full steam at the end of 2012, interest rates on long-term Treasuries and mortgage backed securities have risen rather than fallen as was the intent of the policy.
These changes, anticipated changes, and time inconsistency of policy add to uncertainty. With the large magnitudes of the securities purchases, frequent changes in the policy, and little consensus on the impacts, there is no way that such a policy could be characterized as predictable or rules-based. For these reasons a number of policymakers inside the Fed have publically disagreed with the policies.
[T]he debate now appears to be not over whether such a rules-based policy should be adopted, but rather over when it should be adopted. The key question is whether or not we have returned to normal times, and if not, when we will return. In either case it would appear to be time to prepare.
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The full remarks are below (link) and we certainlly anticipate this particular Q&A to be far more exciting than the 10 words per minute that will be the norm of all Yellen testimonies for the next several years.