For the Fed's Yellen 'conventional' unconventional policy is enough
By David Chance
WASHINGTON (Reuters) - For all the talk of a radical shift in central banking policy, from the permanent use of negative rates to helicopter money drops, Federal Reserve Chair Janet Yellen appears to believe she can tackle any future downturn using the tools currently at her disposal.
Speaking in Jackson Hole, Wyoming, on Friday after a Fed policymaker and other economists proposed a radical overhaul of central banking, Yellen argued that bond purchases and the ability to pay interest on excess reserves as well as forward guidance would be enough to combat any downturn.
"Our current toolkit proved effective last December (when the Fed raised rates)," Yellen said in a speech in which she firmed up expectations of a second rate rise from the Fed, possibly as soon as September.
"In an environment of superabundant reserves, the FOMC raised the effective federal funds rate...by the desired amount, and we have since maintained the federal funds rate in its target range."
So much for radical change of the type proposed by John Williams of the San Francisco Fed earlier this month. Williams made the case for an eventual move to nominal growth targeting or a shift in the inflation rate upwards to give central banks the tools to fight the next economic downturn.
"Helicopters, negative rates or a higher inflation target remain confined to other central banks or academic circles," Commerzbank economist Bernd Weidensteiner wrote after Yellen's speech.
Yellen's seeming reliance on more quantitative easing was challenged at Jackson Hole by Marvin Goodfriend, a professor of economics at Carnegie Mellon University and a former policy adviser at the Richmond Federal Reserve bank, who said he believed negative rates would be a far more effective policy tool.
"Interest rate policy is by far the most flexible, the least intrusive to markets, and has proven capable of targeting low inflation," he said in a presentation after Yellen spoke. Continued...