When Will Janet Live Up To Her Reputation?

Authored by Kevin Muir via The Macro Tourist blog,

I am asking you to put aside all your notions about monetary policy for a moment, and think about the next couple of points with an open mind. Forget about scary Central Bank balance sheets. Fight the urge to worry about the unprecedented quantitative easing programs. Dismiss the warning cries of the frightening levels of debt. Ignore the apocalyptic forecasts of coming stock market crashes. Let’s just have a look at the data. And most of all, let’s not worry about what should be done, but think about what will be done.

Rightly or wrongly, the Federal Reserve has a dual mandate. They are tasked with maximizing employment and maintaining price stability. Although many will debate what constitutes price stability, the Federal Reserve has interpreted it as a 2% inflation rate. You might think this absurd, so be it. It is what it is. Complaining will get you about as far as yelling at clouds.

When Janet Yellen took the reins of the Federal Reserve, many pundits predicted a period of exceptionally easy monetary policy as she was widely viewed as a uber dove. But has her reputation proved deserved?

The Fed’s preferred inflation gauge is the PCE Core Index. Don’t forget the 2% rate is a target over the long run. So if the Fed was meeting their objective, we should see half the observations above 2%, with the other half below 2%. Just for kicks, I put together a histogram of the PCE YoY% rate since Yellen took over.


Some dove. Yellen has consistently undershot her inflation mandate. Contrary to what most believe, Janet has been one of the most hawkish Central Bankers out there.


Why then does everyone think she is so dovish? Too many are focused on the Phillips Curve and are convinced the low employment rate will usher in higher inflation rates.


If you are a Phillips Curve disciple, it seems like the Federal Reserve is way behind the curve, and that Janet Yellen is being irresponsibly easy. When combined with the low nominal rates and the elevated Fed balance sheet, it is easy to fret about the fact that Janet is not raising quickly enough.

Yet what is the market telling us? The US Treasury yield curve has been flattening ever since Yellen took over.


The bond market is speaking, but most aren’t listening. It is telling us that Yellen is tightening too quickly. Or at least, she is by no means anywhere near as easy as the popular narrative.

Could it be that the bond market understands labour dynamics better than the supposed labour expert Janet Yellen?

The Phillips Curve was at best a dubious rule, but in the current environment, it is next to useless. Does anyone really believe the government statistic of a 4.3% unemployment rate?

Here is a great chart from Meridian Macro Research that shows the employment-population ratio versus the unemployment rate.


So let’s think about the current situation. We have a perceived dovish Fed Chairperson who has failed miserably to achieve her inflation target, and although the other half of her mandate appears on the surface to be bumping against constraints, the idea that she has maximized employment is laughable. As she tightens, the bond market smells the coming slowdown (recession?) and flattens the yield curve.

I know this flies in direct opposition to the common belief that Yellen is a super dove who is way behind the curve. But if you take a step back and look at her record, it is a difficult case to make. She is undershooting her inflation mandate by a wide margin.

Now you might believe that target ridiculous, and Yellen should immediately crank rates to return monetary policy to sane levels. Yeah, I understand that argument, but it’s not relevant. The Fed is not about to change its stated goal (unless to raise their inflation target). I suggest you forget your complaints, and go back to yelling at kids to get off your lawn. I am just going to accept the Federal Reserve as another Central Bank that will inevitably debase our hard earned money. And the next big surprise will not be Janet becoming even more hawkish, but instead, Yellen living up to her reputation as an uber dove.


brushhog Wed, 06/14/2017 - 12:16 Permalink

I think this is a fake rate hike. Something isnt functioning like past rate hikes. How can interest paid on savings accounts be staying the same after 3  rate hikes? How can bond yields be falling?? If interest rates dont go up, its not a rate hike.

Last of the Mi… Wed, 06/14/2017 - 12:18 Permalink

She's covering the FANGs quite nicely, she knows what her job description is, or more importantly what it isn't and that my friends includes 99% of the country at this moment.

NDXTrader Wed, 06/14/2017 - 12:20 Permalink

Why is it so hard for people to understand that Yellen hates Trump. She's as left wing as Bernie. She is going to remain hawkish until Trump gets rid of her. She made every excuse in the book to stay loose under Obama, and now she will make every excuse to stay tight. You think she wants Trump tweeting about how much the market is up?

small axe Wed, 06/14/2017 - 12:22 Permalink

she has continued the Fed's 104-year history of rape and pillage of the American worker in grand style. Isn't that enough to ensure a stellar reputation? What more could the Rothschilds want?

saveUSsavers Wed, 06/14/2017 - 12:23 Permalink


Harry Lightning Wed, 06/14/2017 - 12:30 Permalink

It just might be that the same forces pushing the stock market up are the forces also pushing the bond yields and spreads down : too much liquidity. In normal times, the real rate of inflation comparisons may hold water, even though the historical real bond yield is about 175 basis points higher than where long bonds trade today. Which is another sign of too much liquidity chasing too few bonds. Just saying the words "too few bonds" in a world awash in debt shows just how much liquidity is in the global market and needs to be vacuumed away. So while traditional measures of economic strength may still be gleaned from the performance of the bond market, I caution that what we may be seeing is an application of Occam's Razor - the simplest explanation is probably the correct one. Too much global liquidity distorts the prices of financial instruments, and only by draining that liquidity back to more normal levels by historical standards will the bond market once again be an oracle of insight as to the contemporaneous condition of the economy.

moonmac Wed, 06/14/2017 - 12:51 Permalink

I can't buy enough “American Made” shovels and rakes at Goodwill for $1.99. When a hundred thousand only buys a thousand in goods I’ll be glad to have some cheap well made tools laying around. Convincing my girlfriend is a different story. She always grabs my 150 year old shovels and saws to dig holes and cut wood so she’s totally clueless about everything like all women including Grandma Yellen.

Angry White Guy Wed, 06/14/2017 - 14:48 Permalink

"New lows in the unemployment rate""New lows in the .gov manipulated, completely useless, completely a misrepesentation of reality, Jewish approved, unemployment rate"Fixed it.