When Janet Yellen testifies to Congress for the first time as chair of the Federal Reserve, she will have a very unusual second chance to make a first impression.
Given her long career in the central banking system, everyone thinks they know exactly what she will say and how she will act. She’s been pegged as an über-dove, and the general expectation is that she will be looser, for longer, than even Helicopter Ben would have been. “Loose woman” has never been a term of praise, and it certainly isn’t in this case. This is what people are thinking about Janet Yellen.
I don’t agree. If you look at her record, she’s actually been more hawkish, on many votes, than other Fed members who are considered more hawkish in general. When she has been dovish, as over the past several years, events have proven she was right. She hasn’t been a dove for ideological reasons, but based on a correct reading of the data.
The current policy mix—dialing back the Fed’s stimulative bond purchases while emphasizing that rates will remain low—has Yellen’s fingerprints all over it. It reflects a fairly evenly calibrated set of expectations around the real economy and the financial markets. Not only that, the Fed has quite a bit of its credibility tied up in the tapering process. After the false alarm last September, which shook the market’s understanding of the Fed’s decision process and threatened its credibility in orchestrating a successful taper, any interruption in the current stimulus drawdown—absent some sort of compelling reason—would raise similar questions.
Yellen doesn’t need that as she takes the reins. The Fed, as an institution, doesn’t need any more short-term drama. The weaker-than-expected economic data we have seen, along with the minor market drawdowns, doesn’t justify any modifications in the current program; therefore, there won’t be any.
In fact, if you look at the broader economic picture, as I wrote yesterday, there are more reasons to suggest tapering should be accelerating rather than slowing, including reasons that Yellen is known to weigh heavily. In the short term, expect Yellen to continue the current taper. In the medium term, expect her to respond to the data—which, on current trends, will probably mean tightening more than most now expect.
Fear of interest rate increases has subsided as rates have ticked back down. The Yellen surprise here in the next 12 to 18 months will likely be to move rates up faster than is now expected. Keep that in mind as you build your portfolios.