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Jobless and inflation thresholds will only complicate Fed policy

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In this video Saxo Bank’s Chief Economist Steen Jakobsen discusses the ‘revolution’ in Federal Reserve Vice Chairman Janet Yellen’s recent words. She is actually the first in Federal Reserve management to indicate the possibility of moving away from a calendar outlook - i.e. a Federal Reserve on hold until 2016 – and instead opting for a combined threshold on unemployment and inflation.

This actually makes things far more complicated, although the goal is to communicate more transparently, says Steen Jakobsen.

It would open a can of worms in terms of the actual data to be compared and the thresholds. What kind of unemployment rate is the Fed going to use – long-term or short-term or adjusted for people with or without jobs? In terms of inflation - is it the core inflation or overall CPI inflation?

If it eventuates though it will be a ‘revolution’ in that the Fed is admitting monetary policy doesn’t work. In being more communicative though the Fed is hoping that the market will adapt to the outlook the Fed has. That’s not a good solution though because according to Steen the Fed is one of the worst predictors of the future and future growth.

For more comments by Steen Jakobsen see his blog Steen's Chronicle on TradingFloor.com