Investors scouring Janet Yellen’s speech last Friday for clues on short-term interest rates came away disappointed. The Fed chair chose to deliver a more important message: The future of U.S. macroeconomic policy cannot be like the past.
Dealing briskly with the immediate future, Yellen made it clear that the Fed’s short-term stance is watchful waiting — just like before the speech. Turning to the main theme of the annual economic policy conference, Yellen addressed a much bigger question.
Mainstream economics has long proposed a basic division of labor between monetary policy and fiscal policy. Interest rates are easy to change, so they’re well-suited to managing the short-term economic cycle; taxes and public spending involve hard choices and far-reaching consequences, so they aren’t. Yellen’s basic point was that this thinking will have to change.