The right message

Yellen's Fed hopes sound like wishful thinking

Everyone wants to know what Janet Yellen will do about the taper. It's too early to know. However, the chairman-designate of the US Federal Reserve has already provided her answer to a more fundamental question: what can central banks do to improve the economy? Her judgment - a great deal - sounds like risky wishful thinking.

Yellen accepted her nomination with a statement that included a broad interpretation of the mandate of the Fed ("to serve all the American people"), a broad comment on the relevant woes of those people ("too many Americans still can't find a job and worry how they will pay their bills"); and a bold promise ("The Federal Reserve can help.")

The elegant words are the latest expression of Yellen's consistent attention to the Fed's mandate to maximise employment. In line with the dominant economic thinking of the 1960s, when she was a student, she believes that monetary policy can encourage spending, lending and job creation when there are in short supply. Yellen also cares about inflation and financial stability - she mentioned both in her speech - but right now she appears to consider those less important than the power to stimulate the economy.

There are times when more aggressive monetary policy can speed economic activity. This does not seem to be one of those times, not after five years of monetary policy set at maximum support. Even if it is too early to retreat, additional monetary stimulus is more likely to distort financial markets than to increase hiring.

On the other hand, the Fed, and other central banks, could do a great deal more to support financial stability. They could become more intrusive regulators and their leaders could speak out more firmly against leverage and excesses in the financial system. They could look for opportunities to remove the distortions created by ultra-low interest rates.

Yellen is right; the Fed can help.

But the best help it can offer is to point out that monetary policy has done pretty much all it can. Now it's over to the politicians.