No worries over 'embarrassment' for Fed's Janet Yellen: Don Pittis

As the Fed chair scales back the outlook for increased interest rates, media commentary has sounded like an ornithology lesson involving a battle between hawks and doves. This birdwatching guide explains why Yellen is no red-faced warbler, even if the chickens come home to roost.

Hawks battle doves as critics wait to see if Yellen's chickens come home to roost

Hawks and doves go at it as Fed chair Janet Yellen and her team at the Federal Open Markets Committee study whether the United States faces a bigger risk from inflation or recession. (Reuters)

Does Janet Yellen have no shame? In the run-up to yesterday's Fed statement you might have imagined the world's most powerful central banker hiding red-faced in her office as people read the latest outlook on U.S. interest rates.

Among the predictions were that Yellen would face "embarassment."

Others were a muddle from hawkish doves and dovish hawks that might have left a reader thinking Yellen was hanging her head after a failed birdwatching expedition rather than giving us an update on the U.S. and world economy.

But, wise as an owl, Yellen has proved in her previous statements there is no way she can be accused of counting her chickens before they hatch. 

"The Fed probably looks back at late last year with some embarrassment, when it suddenly promoted concerns about the global situation in the wake of China's August currency revaluation, only to scrap these concerns at the next meeting," said one analysis titled Fed to prove less dovish than expected?


Predictions of embarrassment went both ways: Had Yellen been fearful and then not fearful enough, or vice versa?
Federal Reserve Board chair Janet Yellen has no need to feel embarrassed after yesterday's interest rate statement. (Reuters)

But before we get into that, we need a discussion of all that darn bird language. As the Wall Street Journal once asked about a different central banker, Mario Draghi: Hawkish Dove or Dovish Hawk?

As someone who never seems to get the two straight, I am sympathetic to the idea that, in the use of any financial jargon, the result, if not the intent, is to turn something simple into something incomprehensible to the average Jane or Joe.

A couple of 4-letter words

Hawks think interest rates should tend to rise, other things being equal. Doves think rates should remain low or fall. Annoyingly, there is not an obvious way of remembering the difference. Unlike starboard and port, hawk and dove have the same number of letters. 

And while hawks kill and eat doves, I have never thought up a mnemonic story to make that a useful allegory. (Suggestions for helpful hawk-dove distinguishing devices are welcome in the Comments below.)

Just because you are a hawk one day does not mean you can't change your mind and be a dove the next.

Such a conversion really just means that you've looked at new data and you now think rates have gone high enough, or that they need to fall to coax the economy out of a slump.
While oil production slows in reaction to sagging world prices, other domestic indicators such as U.S. auto manufacturing and sales have surged. (Reuters)

According to Yellen's various critics, this is where the embarrassment would start. After studying the outlook for the economy in December, Yellen and her Federal Open Markets Committee foresaw a gradual warming of the domestic economy. Lower unemployment and a growing shortage of economic resources were the canary in the coal mine for higher prices. 

Killing the goose

Generally, economists think those kinds of shortages and rising prices result in rising inflation. Thinking that made Yellen a hawk, in other words someone who thinks interest rates need to rise to prevent inflation. Clearly she needed to act before the chickens came home to roost.

Doves, however, feared that raising rates would kill the goose that laid the golden egg. Some were mad as a wet hen that she had moved so soon.
Idle U.S. oil rigs stand beside a sunflower field in North Dakota last week. Falling oil prices have finally begun to slow drilling and fracking in U.S. shale, creating a wider effect on the economy. (Reuters)

As the new year began, renewed trouble in China sent markets crashing. A rising U.S. dollar and falling oil prices meant that higher-cost U.S. shale producers were among the first to face a hard landing. There are fears that banks will be stuck with bad loans, passing that resource weakness on to other parts of the economy.

Forced to eat crow?

Some economists thought Yellen would have to eat crow and lower rates back down to zero. In the event, the committee unanimously agreed that the U.S. economy remains on an upward track, though most analysts read the statement to say it may not be moving as quickly as they thought at the end of last year.

The fact is even if the economy starts to sag very seriously, Yellen is unlikely to be embarrassed. After years at an interest rate of zero, having finally broken the ice and pushed through a quarter-point rise must feel to Yellen like a bird in the hand, even if she can't raise rates as fast as she had expected.

While yesterday's policy statement shows long-term optimism for the U.S. and the world, Yellen has repeatedly said she will watch the economic signals carefully and adjust the pace of rate increases to the needs of the economy.

She has gone even further. One advantage of beginning to increase rates is that it gives the Federal Reserve a buffer, so that she has "some scope to respond to an adverse shock to the economy by lowering the federal funds rate," Yellen said at her last policy statement.

Whether she is currently a hawk or a dove or some other bird altogether, Yellen has no need to be embarrassed for her intention to adapt her policy to the actual and changing state of the U.S. economy.

However, one piece of advice if she does decide the economy needs a cut in rates: Duck.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis​

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.


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