Janet Yellen Is the Wolf of Wall Street

By Heidi Moore, Guardian UK

20 March 14

At her press conference, the Fed chair declared a view of the economy with a human face – a view that Wall Street hates

PLUS: Federal Reserve axes economic stimulus

all Street is finally being forced to think for itself.

Today marked the first press conference for Janet Yellen, the first female chairman of the Federal Reserve. The Fed holds these press conferences regularly to let the public know how the nation’s central bank is delivering on its two major tasks: lowering the unemployment rate so that nearly all Americans have jobs; and controlling inflation, to make sure you’re not paying too much at the supermarket.

It was historic enough to see a woman deliver the official diagnosis on the US economy: the economy is growing, but slowly. Unemployment is still too high. Millennials are living at home.

Yet Yellen’s first policy statement was historic for another major reason: she showed she is running a very different kind of Federal Reserve than the one Ben Bernanke ran. Unlike Bernanke, who often catered to Wall Street’s fears, this new Federal Reserve appears reluctant to play the usual reindeer games.

The Fed is stepping away from its reputation as a bunch of economics nerds eager to please the cool frat boys on the trading floors.

The best example came when Yellen wiped away one lazy way of measuring the economy’s health. The Fed, under Bernanke, promised that when the unemployment rate hit 6.5%, the central bank would raise interest rates. This was called quantitative guidance, and it fed Wall Street’s fetish for largely made-up numbers. The 6.5% benchmark was a big hit with traders. It meant they didn’t have to think very hard: when unemployment hit 6.5%, Wall Street could start girding itself for a rise in interest rates.

Then Yellen shut down the betting parlor. In a statement, the Fed said it “will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. This is what is now called ‘qualitative guidance’”.

Translation: the Fed is looking at when the economy improves, and the economy comprises a giant number of measures and statistics. If Wall Street wants Cliffs Notes, it will have to look elsewhere.

That was Janet Yellen’s declaration of independence. And that matters even – especially! – if you don’t work on Wall Street.

Here’s why: Wall Street cares a lot about when interest rates rise – it determines how much profit traders at Goldman Sachs and Morgan Stanley make on things like Treasury bonds and mortgages.

The result of the Fed’s 6.5% benchmark: all market pundits did every month was spend hours going googly-eyed over the unemployment rate. On Twitter, the watering hole for economists and media, it became a game called #NFPGuesses, where “NFP” stood for “non-farm payrolls,” the technical term for what the rest of us call the unemployment rate. Pundits and economists would try to guess the unemployment rate, and then, like holding your March Madness bracket printout at the bar, everyone would cheer or groan about whether they correctly nailed the score – never spending much time to think about the lives, the jobs, and the faces underlying those employment numbers. Those were too distant from the elite world that can afford to think about data as a cold number.

This hype-ocracy was both short-term and misguided: the unemployment rate was dropping, yes, but that’s because more people were dropping out of the workforce. The unemployment rate only measures people who are still in the workforce and can’t find jobs; it ignores those who have given up.

For normal people, at the same time, interest rates became a distant concern. The economy is so unstable, and banks are so tight with money, that most people have had a hard time trying to borrow month for everything from mortgages to home equity lines of credit to auto loans to small business loans. The only time most people have seen an interest rate recently was to check on their credit-card statements.

As a result, obsessing about interest rates was becoming one of those sharp divides between Wall Street and Main Street: while traders obsessed about when interest rates would rise, normal people were still trying to figure out where the jobs would come from.

Yellen has swiped the blackboard clean. No longer will the Fed promise to raise interest rates at 6.5% unemployment. Instead, the Fed will raise interest rates when the economy is strong enough to justify it. Wall Street will just have to get over itself.

Yellen was clear that from now on, those market pundits are going to be forced to really think about where the economy is going, using a range of numbers, including how many people are dropping out of the workforce, how easy mortgages are to get, and whether regular people find it easy to borrow.

In her comments today, Yellen showed a sensitivity to the economy as real people experience it: mortgages that are hard to get, businesses that aren’t investing, “kids shacking up with their families”, people dropping out of the labor force because they can’t find jobs.

This is a sensible view - a view of the economy with a real and human face - but Wall Street hates that. Wall Street thrives on numbers. It believes the highest and best use of the Federal Reserve’s time is coddling the financial world. The Fed is no longer coddling. It is cutting its Wall Street-centric stimulus program, called quantitative easing, and it’s ending its cheat sheet for traders.

This approach will go down hard. Peter Boockvar, a managing director with the Lindsey Group, derisively called the Fed’s changed approach “winging it”, and complained, “policy is now even more subjective”. He concluded: “not helpful”.

Yellen seems to embrace that. She appeared to refuse to be the oracle that market strategists want. “This is the committee’s forecast, and it is based on the committee’s understading of the economy at this time,” she said with finality to inquiring reporters. “And that could change over the next several years.”

Yellen doesn’t know the future. Her radical and historic act today was in admitting it.