“It’s a constant learning process by both the Fed and the markets,” said Joachim Fels, global economic adviser for Pacific Investment Management Co., which oversees $1.43 trillion in assets.
Yellen acknowledged that the policy-making Federal Open Market Committee and investors might not always see eye-to-eye. “In such situations, the Committee must do what it believes is appropriate while clearly explaining the rationale for its actions,” she said in a footnote to her speech Tuesday.
‘Automatic Stabilizer’
Yellen used her spoken remarks though to extol the symbiotic relationship between the central bank and the financial markets. “This mechanism serves as an important ‘automatic stabilizer’ for the economy,” she said.
Her comments come against the backdrop of continued criticism from Republican lawmakers and economists that the Fed is following a discretionary monetary policy that investors don’t understand and is hurting the economy as a result. They want the Fed to follow a monetary policy rule, such as the one espoused by Stanford University professor John Taylor. It uses a simple equation to link changes in interest rates to movements in inflation and the economy.
With her remarks on Tuesday, Yellen was “implicitly defending the Fed’s approach in the rules versus discretion debate as being one that’s systematic” and understood by the markets, Crandall said.
‘Ideal World’
It’s an “ideal world” when central bankers and financial market participants are in an sync on how monetary policy should respond to incoming economic data, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. In that case, “the expected path of policy rates should adjust before even the Fed moves.”
Unfortunately, “we haven’t gotten to that point,” Feroli added -- in spite of Yellen’s embrace of the market’s latest moves in her speech.
Case in point: The ups and downs of asset prices over the last half year as investors have tried to adjust to what Washington-based Cornerstone Macro LLC partner Roberto Perli said were seemingly big and frequent changes in the Fed’s stance.