Monetary Confidence

While chairing her first meeting as the head of the Federal Reserve, Margaret Yellen* delivered clear messages with major significance for markets, especially the fact that the U.S. is confident about its growing economy and the gradual reduction in unemployment. The next step is also the most predictable: The easing of the monetary stimulus measures will continue; the monthly injection of liquidity will drop by $10 billion down to $55 billion, which includes $25 billion in real estate bonds and $30 billion in public debt; and the stimulus is likely to wind down completely by next fall, assuming that inflation is sufficiently under control.

But Yellen is not just following the Bernanke plan. In addition to stopping the stimulus, she has also stopped mentioning the unemployment rate as a monetary condition. That does not mean that reducing unemployment is not one of the Fed’s objectives — perhaps the main one — in these circumstances. Rather it means that U.S. monetary policy is formally stepping away from using unemployment as a reference in changing interest rates when deemed necessary. The reason, once again, is that the Fed is confident the economy has started on the path to growth — with the projection for next year now at 3.1 percent — and as a result the unemployment rate in the next cycle will easily drop below 6 percent.

By all appearances, the Fed has done its homework. Wall Street and investors have been given a clear picture of the monetary program upon which they can base their decisions, at least with respect to the exceptional measures. The details, which are not yet established — in part because they depend on imponderables — such as the types of interest, can be calculated with a high degree of probability. For example, an increase in interest rates will not coincide precisely with the end of the stimulus; it would be important to maintain the rate at 0 percent for at least a full quarter after the current monetary exception ends.

Yellen’s first session suggests that the U.S. will not focus on the potential consequences that the easing may produce on the situation in emerging countries. It appears there will be sufficient information and enough time to adjust to the new situation. And that is no small thing.

Editor’s note: Her name is actually Janet Yellen