Yellen May Be Doing Powell a Favor on Raising Rates
(Bloomberg Opinion) -- Janet Yellen may be doing a solid for Jerome Powell, her successor at the helm of the Federal Reserve.
Yellen, now Treasury secretary, says higher interest rates would be beneficial for the U.S. economy. Both borrowing costs and inflation have been too low for the past decade. “If we ended up with a slightly higher interest rate environment, it would actually be a plus for society’s point of view and the Fed’s point of view,” she said in an interview with Bloomberg during her return trip from a Group of Seven finance ministers’ meeting in London.
Fed officials, who set monetary policy independently, have historically bristled at White House or Treasury folks talking about rates. In this instance, the central bank ought to welcome the intervention. Yellen speaks with credibility because she led the institution from 2014 to 2018. She’s also saying what Powell is reluctant to for fear of causing market ructions. While some officials have signaled a readiness to discuss paring quantitative easing as soon as next week's meeting of the Federal Open Market Committee, Powell has insisted the time isn’t right to talk about it. Once he does start, he’ll need a clear and consistent message. By framing an eventual withdrawal in a positive light, Yellen is perhaps giving some cues.
The dangers are on the mind of central banks in Asia. They want to say things are better and have that reflected in policy — just not too aggressively. The Reserve Bank of Australia is likely to retire efforts to maintain the yield on the three-year government bonds near zero, economists say, while keeping some form of quantitative easing. The Reserve Bank of New Zealand recently projected higher rates by the end of 2022, but Governor Adrian Orr spent quite a bit of time in his press conference playing down the notion. The Bank of Korea says it’s preparing for an “orderly” exit from ultra-accommodation. Some traders reckon that will be late this year.
This circumspection points to the broader issue confronting central banks. Last year was one of the worst in the past century for the world economy, owing to the pandemic. It may be followed by one of the best in recent memory, coupled with an uptick in inflation. Policy makers welcome this, but need to be careful of doing so too loudly. They want to gently normalize their stance at some point. That means getting the language right. Yet the more they wait to perfect the verbiage, the more circumstances risk getting away from them.
In her interview, Yellen spoke of the ghosts of the post-global financial crisis era. Inflation didn't ignite despite strong employment and considerable policy accommodation. She once called it a mystery. She and her central bank counterparts around the world kept wrongly anticipating climbing inflation. They are chastened by the experience. “We will now be putting a greater weight on actual, not forecast, inflation in our decision making,” RBA Governor Philip Lowe said in an October speech, a theme he has returned to often.
This anxiety is understandable. Nevertheless, the bankers should forgive themselves. While the period following the failure of Lehman Brothers Holdings Inc. was a trauma, Covid-19 has inflicted far greater damage. This time, fiscal and monetary stimulus came sooner and was more aggressive. The rebound is showing signs of being more robust. Fed policy makers should at least chat a bit more freely about tapering. They can do that while reiterating the message that hikes in the benchmark rate are still ages away.
It’s a world Yellen knows. “I don’t believe they’re going to screw it up,” she said in the interview. Ultimately, her remarks are a vote of confidence in the institution, led by a man whose future she’ll help determine; Powell’s term expires early next year. Tapering isn’t the only thing on the Fed’s horizon.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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