You have to feel a little sorry for Janet Yellen.
The new head of the Federal Reserve gave her first press conference Wednesday, and she came up a little short.
The more she talked the more stocks sold off.
And while you may look at that as a failure on her part, it actually wasn’t. Yellen, who was the vice chairman under Ben Bernanke, just isn’t as astute as her former boss was in salving Wall Street’s feelings.
Equities were down slightly after the Fed’s Open Market Committee reduced Quantitative Easing (QE) by another $10 billion a month to $55 billion and said words in its communique that were considered a bit more hawkish.
As Yellen was speaking — sitting behind her desk like a schoolmarm — the Dow Jones industrial average was suddenly down 201 points before it recovered some to close off 114 points.
And the real yellin’ was in the bond pits as selling was across the board on all of Uncle Sam’s maturities.
Hawks, in case you don’t know the lingo, are those who sit on the Fed and think the Central Bank should not be looking out for Wall Street interests. They are the ones who’d like to see QE wound down entirely.
Yellen, in her press conference after the announcement, didn’t say a whole lot that was new. But she did repeat, several times, that QE will be history by the fall. Wall Street was expecting that, but they want to hear some placating words too — and Yellen didn’t mother them by saying that.
How would I grade Yellen’s performance?
I’d give her a B for honesty; a C for clarity and an F for understanding what the hell is really going on in the economy. Before I get to that last grade, let me deal with the issues of honesty and clarity.
Alan Greenspan, who chaired the Fed until the mid-2000s, is the baseline for my measurements.
He was, in my opinion, nothing short of an economic criminal who steered the country into a disastrous situation because he believed he was beholden to politicians and to Wall Street and not to the American people.
Greenspan gets an F for honesty, an F- for clarity and an F for understanding.
Bernanke was dishonest in the sense that he would often say things in his press conference that contradicted the official Fed statement (a D grade in honesty), but he was clearer than Greenspan (a C), although there are few who would argue that Bernanke really understood what the economy was doing (a B grade) during his chairmanship.
So far, Yellen is topping those performances. She seemed to at least attempt to be honest. She was clearer than her two predecessors — as evidenced by Wall Street’s disappointment.
The big problem is that she, like the other two, doesn’t really know what she’s talking about.
I’m not trying to be a know-it-all here. But the Fed is constrained by one thing — it uses official government economic statistics that are often wrong, and tries to project economic growth from that. That’s like trying to make a chocolate cake when you incorrectly use salt and pepper as your two main ingredients.
As they say in economics, garbage in, garbage out. As they say in cooking school, you need to follow the recipe to end up with a chocolate cake.
Yellen took one step Wednesday that was inevitable. She distanced the Fed from the unemployment rate, although she seemed to be doing it for the wrong reason. While she said the first quarter’s economy was “reasonably weak,” Yellen also noted “progress in the labor markets has been more rapid than we anticipated.”
Yellen said that before backing off a bit by saying progress toward the Fed’s goal was “broadly unchanged” — whatever that means.
By now everyone in America knows why the unemployment rate is declining. People have been giving up looking for work. And because of this the government no longer considers them unemployed. That’s a hell of a way to get to back to prosperity.
If Yellen wants an A grade for honesty, she has to be clearer on why the unemployment rate is beating expectations.
But there’s one other thing that’s going to surprise the hell out of Yellen and her colleagues in the months ahead.
Right now there are investigations by the House Oversight Committee, the Joint Economic Committee of Congress, the Office of the Inspector General at the Commerce Department (which controls the labor numbers) and a US Attorney or two into whether some of the data that goes into the unemployment rate calculation was fabricated.
These investigations were started after the manipulation was first reported in this column.
If Yellen and the others at the Fed want to fully understand what’s going on — and ace all their report cards — they have to bring themselves up to speed about the cheaters.
It’s inevitable that this fabrication will eventually come out. Hopefully, Yellen and the Fed will gain enlightenment before they make too many more monetary errors.