Confused delivery distracts from Fed’s main message

By Robin Harding in Washington

The same desk where Ben Bernanke used to sit was waiting for Janet Yellen’s first press conference as US Federal Reserve chairwoman on Wednesday, with one subtle change. Its legs had been chopped off to allow for her shorter height.

A similar air of the unsettled amid the familiar pervaded the whole press conference. Ms Yellen’s message sounded a lot like Mr Bernanke’s and she delivered it with confidence. But she also slipped up several times to leave confusion about where the Fed stands.

Her biggest slip came when she was asked how long the Fed might wait between halting its asset purchases and raising interest rates. In response, Ms Yellen made the classic central banker error of giving a specific, six months, in the midst of a nuanced answer.

·

“It’s hard to define but, you know, it probably means something on the order of around six months or that type of thing,” she said. “What the statement is saying is it depends what conditions are like.”

For the financial markets, it did not matter what it depended on. They had heard six months. Add six months on to this October, when the Fed is likely to end its asset purchases, and – depending on the timing of Fed meetings – you get to March or April 2015. That is some months earlier than the Fed had been expected to raise rates.

In a matter of seconds, the S&P 500 shed about 1 per cent and yields on Treasury securities soared. If Ms Yellen did not already realise the awesome power of her every word as Fed chair, she does now.

The most probable interpretation of this remark is that it does not mean very much at all. It was hedged around with qualifiers. In its earlier statement, the rate-setting Federal Open Market Committee said today “does not indicate any change in the committee’s policy intentions”.

It was an unfortunate slip, however, because it was the one solid moment in a muddy set of Fed communications. The FOMC’s statement adopted a new form of qualitative guidance – replacing its 6.5 per cent unemployment threshold – that is so vague as to be meaningless.

The FOMC will “assess progress” towards its goals and “take into account a wide range of information” as it decides when to raise rates. If it did otherwise, or failed to look at labour market conditions, inflationary pressures and financial stability, then that would be informative.

The vagueness of the statement meant that markets naturally looked towards the FOMC’s interest rate forecasts for a better idea of where the Fed is going. Those were hawkish, showing that the median Fed official expects an interest rate of 1 per cent by the end of 2015, up from 0.75 per cent before.

But Ms Yellen said to disregard the forecasts. “One should not look to the dot plot, so to speak, as the primary way in which the committee wants to, or is, speaking about policy to the public at large,” she said. “The FOMC statement is the device that the committee as a policy making group uses to express its opinions.”

From this morass, it is still possible to work out roughly what Ms Yellen meant. She repeatedly said the FOMC’s intentions have not changed and implied that the committee as a whole supports a more dovish policy than its individual projections imply. The most likely conclusion, therefore, is that the Fed does not expect to raise rates until the second half of 2015.

The confusion about when the Fed plans to raise rates distracted all attention from what should have been the centrepiece of the day: the FOMC’s statement that it expects interest rates to stay below their long-run level of 4 per cent “for some time”, even after employment and inflation are back to normal.

That is Ms Yellen’s first big policy action. If the Fed follows through, and convinces markets that it really will behave in this way, it should help to keep bond yields anchored at low levels and support the recovery even after the first rate rises.

“We’ve had a series of years now in which growth has proven disappointing,” Ms Yellen said. “It’s a matter of headwinds from the crisis that have taken a very long time to dissipate and are likely to continue being operative.” That was probably supposed to be the message on Wednesday. Next time, maybe it will come across.

Date: 2015-12-24; view: 765