Fed Vice-Chair Fischer went completely against that of Yellen - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, notes that the speech from the Fed Vice-Chair Fischer went completely against that of Janet Yellen on Friday.

Key Quotes

“Let’s quickly recap on what Yellen said first, because it was remarkably dovish.

She asked “Are there circumstances in which changes in aggregate demand can have an appreciable, persistent effect on aggregate supply?” The traditional economics answer is “no”, but she concluded perhaps, yes, and perhaps one needs to run a “high-pressure“ economy (i.e., to fall behind the curve) to rebalance things; next, she asked “whether individual differences within broad groups of actors in the economy can influence aggregate economic outcomes,” and concluded the ‘representative agent’ technique is flawed; then she asked “How does the financial sector interact with the broader economy?” and answered “I believe we have a lot more to learn”; after that she asked “What determines inflation?” and concluded “I hope that researchers will strive to improve our understanding of inflation dynamics and its interactions with monetary policy”; and lastly she only asked – rather than answered “Do US monetary policy actions affect advanced and emerging market countries differently? Do conventional and unconventional monetary policies spill over to other countries differently? And to what extent are US interest rates and financial conditions influenced by easing measures abroad?”

In short, the head of the most powerful central bank in the world, seven years into a shaky recovery basically admitted the Fed doesn’t understand aggregate demand and supply; the heterogeneity of actors in the economy; how the financial sector influences the economy; how inflation works; or how US policy impacts the rest of the world. That’s hardly confidence-building! (And yet the main takeaway for the markets was that perhaps the Fed should fall behind the curve for a while.)

But Vice-Fed Chair Fischer’s speech appeared much more old school, warning about running “too high-pressure” an economy as “…saying we should keep going until the inflation rates shows us we’re wrong,…you’re going to change too late.” Fischer may not want to be wrong in a new way, but he provided lots of old ways of being wrong as he listed his reasons why the US economy is struggling: low productivity; demographics; weak investment; and lower global growth - all of which are the symptoms not the cause of the problem. Notably, as long as the Fed keeps being that wrong, lower bond yields and flatter curves are still the order of the day.”