On the December FOMC: Good Job, Chair Yellen

We were wrong about Yellen. She showed the flexibility to assume the Fed chair as a dove, but preside over the end of QE, lift-off from ZIRP and normalization of the balance sheet. Lift-off was terribly timed, but she quickly corrected her mistake and, with Fischer, turned the Fed away from the Phillips Curve and toward Wicksell’s model of the natural rate of interest. This is Powell’s policy inheritance, and it means rate hikes will be indexed to improvement in the real economy, and thus not tightenings. Today’s statement. Today Yellen explicitly affirmed this policy framework in her last press conference, noting that the funds rate is now close to r-star, and predicating further hikes on r-star’s expected ongoing recovery. The SEP both lowered expected unemployment rates and expected inflation. The Phillips Curve appears to be dead.