Fed Chair Janet Yellen is deferring to the markets when it comes to rate policy, telling the Economic Club of New York that the Fed scaled back rate increases after investors did the same.
“That’s a good thing,” says Lou Crandall, chief economist at Wrightson ICAP in Jersey City, NJ. “Monetary medicine gets into the blood stream faster if the public can anticipate what the Fed’s response to an economic shock will be.”
Still, there are negatives—investors could become so enamored with their ability to influence the Fed that they press for more stimulus than the Fed can handle, Bloomberg reports.
“The risk is that markets’ perception of such continued accommodation will embolden them even more to try to force the policy hand of the Fed,” Mohamed El-Erian, chief economic adviser at Allianz SE, says.
Yellen’s willingness to continue to listen to the markets for the future will most likely hinge on whether she agrees with how investors respond to the economy. [Bloomberg]
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