Morning Must-Read: Jon Hilsenrath: Fed Chief Yellen Seeks Interest-Rate Consensus

When economic historians write about how it happened that under Fed Chair Ben Bernanke the U.S. economy performed worse than it had under any Fed Chair since Eugene Meyer 1930-1933–or maybe, if we are being strict, Arthur Burns 1970-1978–one important reason will be Ben Bernanke’s desire to seek consensus within the FOMC instead of doing what his previous academic analyses suggested was the right thing to do.

In that context, one cannot but find this from Jon Hilsenrath very worrisome:

Jon Hilsenrath: Fed Chief Yellen Seeks Interest-Rate Consensus: “Chairwoman’s Actions in Her First Six Months Confound View of Her as Strong Advocate of Easy Money….

…Many expected Ms. Yellen to steer the central bank toward extending its long period of superlow interest rates. But she has shown herself willing to move toward exiting from that policy as officials found the economy to be on stronger footing. Ms. Yellen has spent much of this year winding down a bond-buying program meant to hold down long-term interest rates and planning for an eventual increase in the short-term rate the Fed controls, a ‘tapering’ begun before her tenure started. With the bond program set to end next month, officials are turning to sensitive discussions about when to raise the short-term rate—and how to signal the move. Her next test is this week. Meeting on Tuesday and Wednesday, Fed officials will discuss whether to shift their guidance on the short-term rate. They also are seeking to complete a new plan for managing the mechanics of future rate changes….

Ms. Yellen spent much of the spring and summer formulating a plan to manage the mechanics of future rate increases. These mechanics have become more complicated because of all the money the central bank has pumped into the financial system since the financial crisis. Traditionally, the Fed has managed its benchmark rate by moving relatively small amounts of money into and out of the banking system. A new plan, which the Fed could unveil this week, emphasizes two new interest rates. One is a rate paid to banks on money they keep on reserve at the Fed. The other is a rate the Fed will pay money-market funds in trades conducted by the New York Federal Reserve Bank. Shifting these two rates is the planned new mechanism for changing the fed-funds rate.

The apparent recent lessening of labor-market progress has eased pressure on the Fed to move relatively quickly toward a higher fed-funds rate. But some officials are pushing, once again, for the Fed to shift its guidance to the public on that rate. Because of the uncertainty on how the job market will play out in the months ahead, more Fed officials want to stop offering assurances the Fed will wait a ‘considerable time’ to move on rates. Ms. Yellen, in her preparations for Tuesday’s meeting, is looking for an approach on which her colleagues can agree.