Yellen ' s Balance Sheet Baloney

Of the many questions reporters asked Janet Yellen on Wednesday, at her press conference following theFOMC ’s decision to raise the Fed ’s policy rates, my favorite was the very first, posed by theFinancial Times’ U.S. Economics Editor, Sam Fleming.Here is Mr. Fleming ’s question:[You ’ve stated that the Fed wants to delay*] balance sheet normalization until [interest rate*] normalization is well under way. Could you give us some sense about “what well under way” means, at least in your mind — what kind of hurdles are you setting, what kind of economic conditions would yo u like to see, is it a matter of the level of the short term federal funds rate as being the main issue? What kind of role do you see the role of the balance sheet playing in the mobilization process over longer term? Is it an active tool or passive tool? Thanks.And here is Chair Yellen ’s response:Let me start with the second question first. We have emphasized for quite some time that the committee wishes to use variations in the fed funds rate target or short term interest rate target as our key active tool of policy. We think it ’s much easier, in using that tool, to communicate the stance of policy. We have much more experience with it, and have a better idea of its impact on the economy. So, while the balance sheet asset purchases are a tool that we could conceivably resort to if we found ourselves in a serious downturn where we were again up against the zero bound, and faced with s...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs