No worries over 'embarrassment' for Fed's Janet Yellen: Don Pittis

Does Janet Yellen have no shame? In the run-up to yesterday'sFed statement you might have imagined the world's most powerfulcentral banker hiding red-faced in her office as people read the latest outlook on U.S. interest rates.

Among the predictions were thatYellen would face"embarassment."

Others were a muddle fromhawkish doves and dovishhawks that might have left a reader thinking Yellenwashanging her head after a failed birdwatching expedition rather than giving us an update on the U.S. and world economy.

But, wise as an owl, Yellen has proved in herprevious statements there isno way shecan be accused of counting her chickens before they hatch.

• Fed opts to stay course, keeps benchmark interest rate unchanged
• Doomsayers are wrong (so far) as U.S. Fed raises rates

"The Fed probably looks back at late last year with some embarrassment, when it suddenly promoted concerns about the global situation in the wake of China's August currency revaluation, only to scrap these concerns at the next meeting," said one analysistitledFed to prove less dovish than expected?

Red-faced?

Predictions of embarrassment went both ways: Had Yellenbeenfearful andthen not fearful enough, or vice versa?

But before we get into that,we needa discussion of all that darnbird language.As the Wall Street Journal once asked about a different central banker, Mario Draghi:Hawkish Dove orDovish Hawk?

As someone who never seems to get the two straight, I am sympathetic to the idea that, in the use of any financial jargon, the result, if not the intent, is to turn something simple into something incomprehensibleto the average Jane or Joe.

A couple of 4-letter words

Hawks think interest rates should tend to rise, other things being equal.Doves think rates should remain low or fall. Annoyingly, there is not an obviousway of remembering the difference. Unlike starboard and port, hawk and dove have the same number of letters.

And while hawks kill and eat doves, I have never thought up a mnemonicstory tomakethat a useful allegory. (Suggestions for helpful hawk-dove distinguishing devices are welcome in the Comments below.)

Just because you are a hawk one day does not mean you can't change your mind and be a dove the next.

Such a conversion really just meansthat you've looked at new data and you now thinkrates have gone high enough, or that they need to fall to coax the economy out of a slump.

According to Yellen's various critics, this is where the embarrassment would start. After studying the outlook for the economy in December, Yellen and her Federal Open Markets Committeeforesaw a gradualwarming of the domestic economy. Lower unemployment anda growing shortage of economic resources were the canary in the coal mine for higher prices.

Killing the goose

Generally, economists think those kinds of shortages and rising prices result in risinginflation. Thinking that made Yellen a hawk, in other words someone who thinks interest rates need to rise to prevent inflation. Clearly she needed to actbefore the chickens came home to roost.

Doves, however, feared that raising rates would kill the goose that laid the golden egg. Some were mad as a wet hen that she had moved so soon.

As the new year began, renewed trouble inChinasent markets crashing. A rising U.S.dollar and falling oil prices meant that higher-cost U.S. shale producers were amongthe first to face a hard landing. There are fears that banks will be stuck with bad loans, passing that resourceweakness on to other parts of the economy.

Forced to eat crow?

Some economists thought Yellen would have to eat crow and lower rates back down to zero. In the event, the committee unanimously agreed that the U.S. economy remains on an upward track, though most analysts read the statement to say it may not be moving as quickly as they thought at the end of last year.

The fact is even if the economy starts to sag very seriously, Yellen is unlikely to be embarrassed. After years at an interest rate of zero,having finally brokenthe ice and pushedthrough a quarter-point rise must feel to Yellen like a bird in the hand, even if she can't raise rates as fast as she had expected.

While yesterday'spolicystatement shows long-term optimism for the U.S. and the world,Yellen has repeatedly said she will watch the economic signals carefully and adjust the pace of rate increases to the needs of the economy.

She has gone even further. One advantage of beginning to increase rates is that it gives the Federal Reserve a buffer,so that shehas"some scope to respond to an adverse shock to the economy by lowering the federal funds rate,"Yellen saidat her last policy statement.

Whethersheis currently a hawk or a dove or some other bird altogether, Yellenhas no need to be embarrassed for her intention toadapther policy to the actual and changing state of the U.S. economy.

However, one piece of advice ifshe does decide the economy needs a cut in rates: Duck.

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More analysisby Don Pittis