Aberdeen Asset Management Fixed Income Investment Manager Luke Bartholomew comments:

“One of the most interesting parts of Yellen’s testimony today was the questions about creating a policy rule enshrined in law which is billed as increasing transparency. The idea is laudable in principle: creating a rule which the Fed has to stick to, holding it to account, thus making its behaviour more predictable and creating less volatile economics outcomes. But ultimately calls for such a rule are poorly thought through and mark a degree of political interference which is completely counter to the idea of independent monetary policy.

“Firstly no one knows what the best policy rule would really look like. How can you argue something should be the case if you don’t even know what the thing should be in the first place? One of the hardest parts of a central bank’s job is to give clarity to data which is often anything but clear. Central bankers have to use huge amounts of discretion when making policy decisions. That wouldn’t change if a rule was in place. Central bankers have to weigh numerous elements that cannot be directly observed like the size of the output gap, the equilibrium interest rate, and the level of full employment. All of these elements require judgement based on experience and intuition. There is simply no rule which can tell policymakers exactly what to do in all situations.

“So there is very little economic justification for such legislation. Instead its attraction to Congress is that it would allow them to interfere more in the Fed’s decision making, second guessing and even forcing its behaviour. History tells us that such political control of monetary policy rarely ends well.

“We still unreasonably expect central bankers to make perfect decisions based on imperfect information. A giant stick from Congress might just make those decisions even harder to make.”

For further information contact:

Guy Nicholls
Aberdeen Asset Management
Tel: 02074635809
Mob: 07810050539