STOCK MARKET WATCH -- Monday, 7 July 2014

[xchrom]

30. Yellen Lays Out Her Policy Blueprint

http://www.bloombergview.com/articles/2014-07-07/yellen-lays-out-her-policy-blueprint

Over the weekend, I reread remarks that U.S. Federal Reserve chair Janet Yellen made last week at the International Monetary Fund and also read the transcript of her conversation with Christine Lagarde, the International Monetary Fund's managing director.

The IMF event brought together a virtual who’s who of the international economic and financial community, and in one of her most significant policy speeches to date, Yellen seized the opportunity to address head-on some of the major questions confronting modern central bankers. Many of these center around the burden of trying to restore, almost singlehandedly, economic growth, more dynamic job creation, price stability, and durable market stability.

There are seven major takeaways from Yellen's IMF speech. They collectively signal that the Fed will maintain a gradual policy approach for now. Markets, conditioned to expect strong and steadfast monetary support from the Fed, welcome that stance. But Yellen's statements also point to the need for a delicate transition from policy-induced growth to more organic economic growth. If that transition is mishandled, it would trigger renewed financial and economic instability.

First, Yellen recognizes that we could well be in a world of steady-state interest rates that, in both nominal and inflation-adjusted terms, are lower than what historical experience would suggest.
Second, such rates, as Yellen noted, can “heighten the incentives of financial market participants to reach for yield and take on risk.” Indeed, she added, “such risk-taking can go too far, thereby contributing to fragility in the financial system.”
Third, financial stability cannot be divorced from the pursuit of economic well-being, because “a smoothly operating financial system promotes the efficient allocation of saving and investment, facilitating economic growth and employment.”