Janet Yellen is arguably the most powerful woman in the world. Her leadership style can be summed up in one word: cautious.
Since she became head of America’s central bank, the Federal Reserve, in February 2014, the world has braced for interest rate increases.
So far, only one has come.
“My position has been, and remains, cautiously optimistic,” Yellen said in a big speech Monday on the state of the U.S. economy.
Experts wonder if Yellen is too cautious. Two-thirds of the economists surveyed by CNNMoney this week believe Yellen is dallying too much on raising rates. They point out that the U.S. is near full employment and continues to grow.
“It seems like she’s waiting to get everything pointing in one direction when she moves rates,” says Maury Harris, chief U.S. economist at UBS. That just doesn’t happen in the real world. He believes it was a mistake not to raise rates last September or even earlier this year.
The Fed is on hold (again)
Whether you agree with Yellen or not, what we’ve learned in nearly 2.5 years of her tenure is that when there is any doubt, the Yellen Fed goes on hold. Understanding her cautious approach is likely the biggest clue to predicting where the Fed is headed.
So a rate hike in June looks off the table after lousy hiring in May. The rest of 2016 is in doubt, too. There’s less than a 50% probability that the Fed will raise rates before the U.S. presidential election, according to the CME FedWatch tool.
The go slow Yellen Fed wants to avoid raising rates too fast that it spooks markets or causes a recession. But being so hesitant to act is beginning to cause other problems.
The Fed’s new problems
1. Credibility. Yellen is fond of using the word “gradual” to describe her approach to rate hikes. But is six months (or more) between rate hikes gradual? Waiting so long calls into question whether the U.S. economy is really strong enough for rate increases or not.