Tim Duy's Fed Watch

What Should Europe Do?

A quick note before the rest of the day bears down on me.  Kantoos Economics offers another take on the appropriate European policy response.  He rejects the standard line of thinking:

One proposed solution is for Germany to employ fiscal stimulus at home, to increase domestic inflation and increase investment and spending. Simon Wren-Lewis goes as far as to argue that this is what a truly but hypothetical European government would do. I disagree: a European government would employ stimulus in the periphery, not Germany.

Broadly, I agree with this, although I think we view it through a different lens.  If Europe had a true fiscal authority, it would automatically redistribute resources via transfer payments and taxes from wealthly regions to less wealthy regions - thus creating demand in the periphery as it adjusts.  And also, such a system would allow for a mechanism to boost oerall growth as well via deficit spending.

Absent a direct transfer, the next option is an indirect transfer - stimulating Germany in the hopes that greater domestic demand will stimulating exports from the periphery. Assuming that Germany has no interest in pursuing either strategy, Kantoos puts the ball in the ECB's court:

We live in a Keynesian world here in Europe, where downward wage adjustments are very hard. Add to this high debt levels, and it is clear that the internal devaluation process, in the midst of a deleveraging process by households, banks and firms, together with austerity will doom these countries to deflationary recessions....What the ECB should do is to toughen lending standards in Germany, raise collateral requirements, down payments etc., and do the reverse in Spain. This should limit investment and consumption in Germany, and encourage it in Spain. It should mimic a differentiated monetary policy, and try to come as close as possible to the respective natural interest rates.

I think this approach suffers from a number of challenges.  First, if capital is relatively mobile, it would be difficult to prevent a loan in Spain from making its way to Germany, so I am not sure the ECB can produce a differential monetary policy.  Second, it is not clear that easing lending conditions in the periphery would encourage additional spending.  I don't think it will be all that easy to reverse the process of private sector deleveraging in the periphery simply by easing lending conditions.  

More to the point, policy to date has been to match private sector deleveraging with public sector deleveraging - the austerity program.  What the ECB could do in this situation is to alleviate the need for public sector deleveraging by acting to bring down interest rates on government debt in the periphery.  And not with haphazard, start and stop programs the ECB activates only when their back is up against the wall.  But instead, to make it clear they are a lender of last resort for Eurozone nations. 

Also, I can't imagine that slowing the German economy, and by extension, the overall Eurozone economy, by enacting tighter credit conditions is in anybodies economic interest.  I am skepital that this demand will suddenly appear in Spain.  And this, I think, is fundamentally the error in Kantoos' argument - he seems to see this as a zero sum gain.  If we reduce demand in Germany, we can make it appear in Spain, thereby reducing the risk of overheating and bubbles in Germany.  There are too many internal frictions to prevent such a smooth transfer of demand.  Instead, acting to slow growth in Germany will only aggravate the drag in the periphery, thus generating more of the hysterisis effects decribed by Kantoos.  

Finally, Kantoos directed his post at Paul Krugman, not me.  But I think that Krugman would see his concerns about high inflation in Germany might refer Kantoos back to this post.

 

 

Spending Update

Real personal spending growth was weakish in March on the back of a solid February gain that supported spending growth for the quarter.  No surprise - don't get overly optimistic or pessimistic about any one piece of data.  Slow and steady is the rule:

Note that the post-recession trend is slowing somewhat as the "recovery" continues, a feature more easily evident in the year-over-year numbers:

Inflation continues to converge to  2 percent:

The recent trend in core inflation, however, is a little above 2 percent:

This may get the Fed hawks a little more nervous.  With inflation hovering around 2 percent, the bar to another round of QE is pretty high.  Overall, I would say this report mirrors my overall read on GDP from last week:

Uninspiring but not disastrous - unless, of course, you are unemployed or have any hope of seeing a return to pre-recession spending, nominal or real.  But good enough to keep the Fed on the sidelines.

Summer Playlist

After a long Oregon winter, I am desperate for summer.  And that's saying a lot - I have been living in the Pacific Northwest for most of the last 25 years.  I actually like the rain at this point.  That said, the slightly warmer temperature have me eager for summer.  And considering that Ken Houghton has already made my tastes public, it is worth mentioning that these songs are high on my playlist right now:

Something About a Truck - Kip Moore

Something about a truck in a field
And a girl in a red sundress
with an ice cold beer to her lips
Begging for another kiss
Something about you and me and the birds and the bees
And Lord have mercy it's a beautiful thing
Ain't nothing about it luck, something about a truck...

Where's Tammy Wynette When You Need Her - Kellie Pickler

I stay torn between killing him and loving him
He stays torn between neon lights and home
How 'bout a honky tonk angel
To tell me how this whole thing works

Where's Tammy Wynette when you need her?...

Springsteen - Eric Church

When I think about you, I think about 17,
I think about my old jeep
I think about the stars in the sky
Funny how a melody sounds like a memory
Like a soundtrack to a July Saturday night
Springsteen...

And still hanging on from last year:

Barefoot Bluejean Night - Jake Own

Blue eyes and auburn hair
Sittin' lookin' pretty by the fire in a lawn chair
New to town, and new to me
Her ruby red lips was sippin' on sweet tea
Shot me in love like a shootin' star
So, I grabbed a beer and my ol' guitar
Then we sat around till the break of dawn
Howlin' and singin' our favorite song...

Bait a Hook - Justin Moore

He can't even bait a hook
He can't even skin a buck
He don't know who Jack Daniels is
He ain't ever drove a truck
Knows how to throw out a line, but not the kind in a field and stream book
No darlin' I ain't even worried, you'll come runnin' back
He can't even bait a hook....

The upshot is that I am getting desperate for county fair season - because, God knows, I will drive though Hell and half of Oregon to hear just about anyone sing a country song.  My best concert is still way back seeing Chris LeDoux play at the Linn County Fair in Albany.  Someone forgot that the general admission seats were not supposed to be the ones right up against the stage.  My wife and I and a friend were packed in group of 20-year olds fresh off the fields and they knew every song by heart. This one hangs on me more each day.  It was his "After the Storm" tour, right after his liver transplant.  A spectacular concert.  And a life cut too short.

Bottom Line:  Looking forward to summer with the above songs in my playlist and the four food groups - water, barely, hops, and yeast.

Bernanke's Shift

There has been a fierce counterattack to Federal Reserve Chairman Ben Bernanke's assertion that he is indeed the same Professor Bernanke that advised the Bank of Japan a decade ago. See, for example, Brad DeLong, David Beckworth, and Ryan Avent.  DeLong identifies this 1999 Bernanke quote:

[Si]nce 1991 inflation has exceeded 1% only twice... the slow or even negative rate of price increase points strongly to a diagnosis of aggregate demand deficiency…. [C]ountries that currently target inflation… have tended to set their goals for inflation in the 2-3% range, with the floor of the range as important a constraint as the ceiling….

and concludes that Bernanke previously believed the inflation target should be between 2 and 3 percent, with 2 percent being a floor.  One could infer, then, that Bernake at one point believed in a symmetric objective around 2.5 percent, with a hard floor and ceiling on 50bp of either side of that objective.  Now the Fed has sanctified a 2 percent target.  

This shift is important and evident in the path of inflation, and was my point in this post.  Prior to the recession, headline PCE inflation was running about 2.4 percent a year.*  Now the trend is a smidgen above 2 percent: 

DeLong, in another post, does a similar picture using core-CPI.  I have tended to shift to headline number number because that is the Fed's stated target and there is widespread misunderstanding about the relevance of core-inflation in the policymaking process.  Indeed, the belief that policymakers are somehow misleading the public about the true path of inflation runs deep in the Fed itself.  Note that Beckworth takes a different direction, focusing on the path of nominal demand rather than inflation and reaches a similar conclusion - the we are witnessing an attack of the body snatchers.

I think we can conclude, by Bernanke's statement's in the past and the actual path of inflation now, that Bernanke has embraced the recession as yet another exercise in opportunistic disinflation in which the Fed can knock another 40bp off the expected rate of inflation. 

The story gets more interesting.  In his press , conference says:

So it's not a ceiling, it's a symmetric objective and we tend to bring inflation close to 2 percent. And in particular, if inflation were to jump for whatever reason and we don't have, obviously, don't have perfect control of inflation, we'll try to return inflation to 2 percent at a pace which takes into account the situation with respect to unemployment.

Avent rightly calls foul on this claim:

Perhaps more telling, the Fed gives a range for projected inflation over the next three years with 2% as the upper extent. If the Fed does indeed have a symmetric approach to the target, as Mr Bernanke asserted yesterday, one would expect 2% to be at the middle of the range, not the top. This is particularly damning as the Fed's estimate of the natural rate of unemployment doesn't appear at all in the projected unemployment-rate range over the next three years; the closest the Fed comes to meeting that side of the mandate is in 2014, when the bottom end of the projected unemployment-rate range gets within 0.7 percentage points of the top end of the natural-rate range. 

Bernanke is clearly misleading us when he claims the target is symmetric as the Fed's own projections clearly treat the target as a hard ceiling.  The next words out of Bernanke's mouth are also telling:

The risk of higher inflation, you say 2-1/2 percent, well, 2-1/2 percent expected change might involve a distribution of outcomes. Some of which might be much higher than 2-1/2 percent.

This was the topic my post earlier this week.  Monetary policy is not neutral with regards to the distribution of income and wealth.  The Fed does not want inflation to exceed the 2 percent inflation target as that will result in a new distribution.  The subsequent alterations to the outcomes will not be symmetric; some will gain more than 2.5 percent, some will lose more.  

Note - and I think this is important - when Bernanke's Fed took the opportunity to shift down the path of inflation by sanctifying the 2 percent target, they were comfortable with the subsequent shift in the distribution of outcomes.  And consider that shift.  At a time when households were overwhelmed with excessive debt, the Fed deliberately chose to increase the real burden of the debt by changing the inflation trajectory.  

Why one would use a balance sheet recession to shift downward the path of prices is certainly something of a mystery.  But it does imply that the Fed wanted to induce a new distribution of outcomes, even knowing that the beneficiaries would not be households.

Bottom Line:  Bernanke is being disingenuous in his defense.  Despite his claims that his earlier views only applied to deflation, his writings still appear at odds with his willingness to embrace a new price and aggregate demand paths.  Moreover, the Fed's own forecasts clearly do not support his contention that the target is symmetric, but indeed a hard ceiling.  The Fed must also know that the by reducing the path of inflation they have knowing altered the distribution of outcomes in a way that is likely to slow the pace of recovery. Finally, with inflation near 2 percent, I suspect the bar toward another round of QE is higher than many believe.

 

* I noticed an error in the original post that slightly underestimated the inflation rate in the 2001-2007 period.  The error is corrected in the new chart.

Distributional Impacts of Monetary Policy

Dean Baker, responding to this Wall Street Journal article, sees an opportunity to make us aware on the distributional impacts of monetary choices.  Specifically, Baker responds to the claim that inflation erodes earnings:

Actually, most wages follow in step with inflation, although some workers do see declines in real wages when inflation rises.

People seem to forget the connection between inflation and wages.  A sustained increase in inflation needs to be accompanied by a matching increase in wages, otherwise higher inflation would simply undermine real purchasing power, leading to slower growth and a subsequent decline in the inflation rate.  To be sure, as Baker notes, while on average higher inflation is matched with higher nominal wages, it does not affect all workers equally - workers with less bargaining power could see their real wages decline even if average real wages hold constant.  

Baker identifies this basic chart (I replaced CPI with PCE inflation) to support his argument :

Notice that Baker correctly shifts from real wages to the broader measure of real compensation.  He says:

These series give the basic story, although they are not perfect for reasons that you do not want to hear about. If you can see a negative relationship (i.e. higher inflation leads to lower real wage growth) you have better eyesight than me.

In fact, the correlation between these two series is 0.36.  In other words, there is a weak positive relationship between inflation and real compensation - although I would be wary about calling it a causal relationship, and instead only point out that although it is often claimed that inflation erodes real wages, this is not obvious.  What is more evident, and causally related, is the link between productivity and real compensation:

 

The correlation is 0.75, and the story is a familiar one - we expect that higher productivity growth results in higher real wage growth.  That said, a careful eye will notice that the growth rates are not identical, yielding this well-known result:

 
Certainly since the 1980s, the gap between output and real compensation is rising.  Another version of this issue is that labor's share of income has been falling since 1980.  What is of course curious is that this occurs despite the sustained period of disinflation.  Those who claim that inflation erodes real wage growth seem to miss that the period since 1980 has seen real compensation growth slow to a pace below productivity growth despite falling inflation.  This issue is taken up by Steve Randy Waldman at interfluidity with a thought provoking post:

An increase in unit labor costs can mean one of two things. It can reflect an increase in the price level — inflation — or it can reflect an increase in labor’s share of output. The Federal Reserve is properly in the business of restraining the price level. It has no business whatsoever tilting the scales in the division of income between labor and capital.

Yet throughout the Great Moderation, increases in unit labor costs were the standard alarm bell cited by Fed policy makers as an event that would call for more restrictive policy. And all through the Great Moderation, except for a brief surge during the tech boom, labor’s share of output was in secular decline...

...even if the Fed didn’t “cause” the decline in labor’s share, Great Moderation monetary policy made it very difficult for labor’s share to grow...

...Since the early 1990s, all actors in the US political system have understood that policies that increase unit labor costs risk a response by the “inflation fighting” central bank, whose “credibility” was swaggeringly defined as a willingness to provoke recession rather than risk inflation. In this environment, the decline of labor unions and their shift in focus from wage growth to working conditions was understandable...

Waldman is saying that the Federal Reserve is at least complicit in allowing the competition between capital and labor to be tilted toward capital (not sure this should be a surprise - I don't see a revolving door between the Federal Reserve and the AFL-CIO).  In other words, monetary policy has a direct impact on the distribution of income.  It's not just simply raising and lowering interest rates to affect the level of output - it has an impact on how the subsequent output is split up.  Waldman offers some policy advice:

All of this is one more reason to prefer the NGDP path target promoted by Scott Sumner and his merry Market Monetarists. It might prove difficult in practice to target inflation without paying some especial attention to wage growth. But a central bank can target the path of aggregate expenditure without playing favorites about who pays what to whom. Simple neutrality by the central bank in the contest between capital and labor would be a huge improvement over the status quo.

Note that even if the central bank is no longer playing "favorites", monetary policy would still have a distributional impact.  For example, reverting to the pre-recession path of nominal spending would likely entail a temporarily higher rate of inflation than currently expected.  And higher than expected inflation will indeed create some winners and losers:

However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate.

Who would be the winners?

Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit care debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.

And once again, we get to the same place - changing monetary policy at this juncture would likely have significant impacts on the distribution of income and wealth.  And an unwillingness to alter this current distribution is likely another reason we would not expect the Federal Reserve to change their basic policy framework away from the current 2 percent inflation target regime.

Initial Claims Up - Time to Worry?

From Bloomberg:

Jobless claims fell by 2,000 to 386,000 in the week ended April 14 from a revised 388,000 the prior period that was higher than initially estimated, Labor Department figures showed today in Washington. The median forecast of 47 economists surveyed by Bloomberg News called for a drop to 370,000. Revisions to previous data have been larger than normal and the government is trying to determine the cause, a Labor Department spokesman said as the figures were released to the press.

Recent softness is pulling the 4-week moving average higher:

Cause for concern?  Given the history of this series, I have trouble see the recent increase as anything but consistent with the normal behavior of claims:

While I would like to see a steady, consistent decline to something closer to 300k, that was never really in the cards.  I would become more concerned if claims backed up as they did in the beginning of last year, but that is not yet the case.  

That said, arguably we are seeing further evidence that job growth will continue to fall short of what many would like to see, which I think is something closer to 300k/per month rather than the 210k average of the last three months.  Indeed, we could be seeing the impact of slowing productivity growth - absent a more rapid pace of final demand growth to boost sales and profits, firms are turning to labor to save costs.  In short, slow and steady continues to be the rule - also from Bloomberg:

“Progress in the labor market is not quite as strong as people had hoped, but we are still on a recovery track here,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida.

That sounds about right.

On Labels

I generally follow the convention of referring to monetary policymakers as "hawks" or "doves."  But what really do these terms mean?  Are they appropriate or meaningful distinctions?  On this topic, Cleveland Federal Reserve President Sandra Pianalto says:

I’ve been part of the Federal Reserve for a long time, more than 28 years. Those labels actually came into play when there wasn’t agreement around an inflation objective. There were some members of the Committee who felt a higher rate of inflation was appropriate. Those individuals were dubbed doves. And there were some that felt that we needed a lower rate of inflation. In fact, one of my predecessors, Lee Hoskins, was focused on achieving zero inflation. And he was considered a hawk.

 We now have agreement and a statement by the Committee that 2 percent is the appropriate level of inflation. So I don’t think the titles of hawks and doves are useful when the Committee has stated that we have a 2 percent inflation goal.

If there are titles that people want to use, I would like to be labeled someone who is open-minded. Or someone who is pragmatic...

Pianalto's point is that now that the FOMC has settled in on a 2% inflation target, there is no distinction between hawks and doves.  Is this true? 

I see her point, but would offer some caveats.  First is that perhaps we could consider the entire FOMC as hawks relative to a more dovish policy such as a 4% inflation target.  Second is that Chicago Federal Reserve President Charles Evans has supported aggressive policy even if inflation rose as high as 3%.  this would seem to be a contradiction to Pianlto's claim that there are no hawks or doves; Evans certainly appears to be a dove relative to the 2% inflation target.

Also, the 2% target is not written in law.  Will this become a litmus test in Senate confirmation hearings for Federal Reserve governors?  The lack of distinction between hawks and doves might simply be a transitory affair if future policymakers have different views - or the economy necessitates different views.

These issues aside, I still think Pianalto's point is well taken.  So how should we use the terms "hawks" and "doves" at a time when most policymakers have coalesced around the same target?  I tend to think of the distinction in terms of the policymaker's inflation forecast.  A hawk is a policymaker who perceives a greater upside risk to the inflation forecast and thus anticipates policy will turn tighter sooner than later.  On the other side, doves tend to see less upside risk to the inflation forecast, or even downside risk, and thus do not anticipate a tighter policy in the near term. (Of course, you could argue that labels are not necessary to begin with, which may be true, but I think will ultimately occur as a means of identifying the different positions of policymakers).

To be sure, these are state contingent labels. Deeper into a tightening cycle, a hawk would be a policymaker more inclined toward further rate hikes, a dove less inclined.  And during an easing cycle, a dove would be inclined to cuts rates sooner and perhaps more deeply.  But in either case, the distinction between a dove and a hawk is the relative timing and or pace of policy changes necessary to achieve the 2% inflation target.

Bottom Line:  The hawks/doves distinction has lost some of its original interpretation as the Fed settles in on a 2% target.  That said, policymakers still have different interpretations of the appropriate policy path given their economic forecast, and those interpretations can separate policymakers into camps that can still be labeled (for ease of exposition rather than a normative judgement) as generally hawks or doves.   In general terms then, a hawk sees current policy as more likely to be too loose than too tight, a dove sees vice-versa, thus imparting some information about the relative views on policy direction.  But Pianalto's final point also defines what we really want in a policymaker - an open-mind, rather than one entrenched in a particular vision of the economy regardless of the realities of the data.  A policymaker who might be a hawk or a dove as circumstances change.

TIC Update

The US Treasury released the February TIC data.  It is worth pointing out the methodolgical change in the data construction in recent months.  Previously, the Treasury used an annual survey of custodians, brokers, etc. to estimate foreign holdings of Treasuries and built on these estimates with monthly transactions data.  This led to persistent "transactions bias" errors over the year, particularly a buildup of Treasury securities in the UK that were really attributable to other nations, notably China.  

Treasury initiated more frequent surveys last year in September and December (in addition to the regular June survey), and now the surveys are monthly.  We are no longer seeing the steady growth in UK holdings as a result:

We see the usual drop ($211 billion in June 2011) in the new series with the June revision and an increase in August that is subsequently reversed.  One offset to the downward UK revision is the upward China revision ($142 billion):

China, however, was not the only upward revision.  Interesting upward revisions are also observe in Continental Europe money centers:

The Belgium numbers see two large upward jumps, one each for the June and September surveys.  Note that the more frequent survey does not eliminate the "custodial bias" in the data.  We don't necessarily know the end owner of each security.  From the US Treasury:

Some foreign owners entrust the safekeeping of their securities to institutions that are neither in the United States nor in the owner’s country of residence. For example, a German investor may buy a U.S. security and place it in the custody of a Swiss bank. In both the SLT and the periodic surveys of holdings of long-term securities, such a holding will typically be recorded vis-a-vis Switzerland rather than Germany. This “custodial bias” contributes to the large recorded holdings in major custodial centers including Belgium, the Caribbean banking centers, Luxembourg, Switzerland, and the United Kingdom.

While we don't know actual final holder of the security, the upward revisions to the Luxemberg and Belgium are possibly another consequence of the acceleration of the European financial crisis and the scramble for Dollar assets last fall.  It will be interesting to see if these holdings increase further as a result of the most recent flare-up in that never-ending saga.

A Reason for Pride?

Via Bloomberg:

European Central Bank Executive Board member Joerg Asmussen said the bank could start to raise interest rates to curb inflation if the economy picks up.

“The ECB will act when needed,” Asmussen said in a speech in Berlin today. “Like last spring when the economic outlook had improved and we started carefully raising interest rates.”  Still, inflation remains “in check” and will drop below the ECB’s 2 percent limit next year, he said.

I am not exactly sure that the ECB's rate hikes last year are something to be proud of, nor would I describe the action as careful.  Those rate hikes arguably accelerated and deepened the European debt crisis, which necessitated a policy reversal in the fall and the massive ballooning of the ECB balance sheet.  One would think that the "careful" policy would have been to have not raised interest rates, thus lessening the degree of financial stress and perhaps avoiding subsequent large scale intervention.  Moreover, one has to question the success of any policy that helped trigger this unfortunate unemployment path:

 
Europe:  Where central bankers just think different.

 

 

 

 

 

Maddening Monetary Policy Making

Ryan Avent directs us to David Beckworth and the following excerpt from Federal Reserve Governor Janet Yellen's recent speech:

Importantly, resource utilization rates have been so low since late 2008 that a variety of simple rules have been calling for a federal funds rate substantially below zero, which of course is not possible. Consequently, the actual setting of the target funds rate has been persistently tighter than such rules would have recommended. The FOMC's unconventional policy actions--including our large-scale asset purchase programs--have surely helped fill this "policy gap" but, in my judgment, have not entirely compensated for the zero-bound constraint on conventional policy. In effect, there has been a significant shortfall in the overall amount of monetary policy stimulus since early 2009 relative to the prescriptions of the simple rules that I've described {italics added}.

The "in my judgement" clause is important.  Not only do the simply rules say more easing is needed, but she agrees with that position.  Beckworth sees hope in this paragraph:

Finally, a prominent Fed official acknowledges what Market Monetarists have been saying for some time: over the past 3 years the Fed has failed to adequately ease monetary policy and thus has passively tightened. 

Avent sees another opportunity to urge for additional stimulus:

One wants to scream, try overshooting for once. Try overshooting for once! Try it! Try pushing inflation up above 2% for a while and see if you can't generate enough growth to soak up some slack in the economy, thereby greatly reducing the risk that any little headwind that comes along knocks the economy back below stall speed. Try it! There is no way that a year of 3% inflation is bad enough to justify this pitiful hiccuping recovery. Try overshooting!

I find myself just plain frustrated, especially if you read further.  Yellen later says:

Risk-management considerations strengthen the case for maintaining a highly accommodative policy stance longer than might otherwise be considered appropriate. In particular, the FOMC has considerable latitude to withdraw policy accommodation if the economic recovery were to proceed much faster than expected or if inflation were to come in higher. 

So far so good...plenty of room to keep the monetary spigots open.  But it begs the question of why shouldn't the Fed be doing more right now if Yellen thinks there remains a policy gap and risk-management considerations give the go-ahead for more policy? Then comes the pivot:

The current economic outlook is associated with significant risks in both directions.

Ugh.  After arguing for more stimulus, Yellen follows up with the fair and balanced approach to economic forecasting:

 In particular, we know that recoveries from financial crises are commonly prolonged, and I remain concerned that the headwinds that have been restraining the recovery could lead to a longer period of sluggish growth and high unemployment than is embodied in the consensus forecasts...Potential upside surprises to the outlook include the possibility that the recovery has greater underlying momentum than is incorporated in consensus forecasts.

She concludes with:

In summary, I expect the economic recovery to continue--indeed, to strengthen somewhat over time. Even so, over the next several years, I anticipate that we will fall far short in achieving our maximum employment objective, and I expect inflation to remain at or below the FOMC's longer-run goal of 2 percent. A range of considerations, including those relating to uncertainty and asymmetric risks, must inform one's judgment on the appropriate stance of policy. As I explained, a variety of analytical tools, including optimal control techniques and simple policy rules, can serve as useful benchmarks. Based on such analysis, I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information. In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates.

Yellen lays out the case for additional stimulus, making clear that the Fed is falling short in efforts to compensate for the zero bound, and then, almost inexplicably, concludes that the current policy stance is appropriate and should only be altered on the basis of incoming data.  How this conclusion follows from her analysis of the situation is beyond me.  After all, if you believe that the Fed is falling short of its mark, why don't you explicitly call on the Fed to do more now?  Why do we need to wait for evidence of slower-than-expected growth when you have already acknowledged general disappointment with the state of the economy as well as policy?

Say what you will about the likes of Minneapolis Federal Reserve President Narayana Kocherlakota.  I might not agree with his view of the economy, but at least he is willing to push a policy position that is consistent with that view.  From his most recent speech:

 My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012.

Kocherlakota sees tightening sooner than later as the natural extension of his economic forecast, and he says so.  The natural extension of Yellen's view is to push for additional easing now, but she just can't bring herself to say it.  What is holding her back?  My guess:  Yellen might want to ease further, but knows Federal Reserve Chairman Ben Bernanke won't push for it, and thus she doesn't want to send an erroneous signal about the direction of monetary policy. 

Bottom Line:  I admit that I am a little frustrated with the doves among Federal Reserve policymakers, as they appear to believe that additional easing is appropriate, but they just can't bring themselves to actually say so.  Instead, they tend to fall back on simply justifying the current policy stance.  Why?  Possibly because they are good soldiers following Bernanke's lead.