Yellen Retreat From Policy Thresholds Doubted as Yields Rise
In her first press conference as Fed chair, Yellen emphasized that dropping a 6.5 percent unemployment threshold for considering an interest-rate increase “does not indicate any change in the committee’s policy intentions.”
Rather than paying heed to Yellen’s assertion, investors seized on an increase in Fed officials’ own interest-rate forecasts and Yellen’s comment that that borrowing costs could start rising “around six months” after it stops buying bonds. Yields on two-year Treasury notes climbed as much as 10 basis points, the most since June 2011.
The market reaction highlights the perils faced by central bankers when they retreat to language investors consider vague after setting precise numerical markers for changes in policy. Lacking specific guidance in the Fed’s policy statement, investors swung toward the next best thing: Fed officials’ own forecasts for the benchmark federal funds rate.
“With the shift to qualitative guidance, the only quantitative metric we have is the fed funds projections from the Fed,” said Dean Maki, chief U.S. economist for Barclays Plc in New York and formerly an economist at the central bank. “So while the statement and Chair Yellen in the press conference said little had changed, the Fed’s projections suggested that there was a notable change in the Fed’s outlook.”
The Federal Open Market Committee said it will no longer link borrowing costs to a specific unemployment rate, saying it would instead consider a broad range of indicators on the labor market, inflation and financial markets.
“We know we’re not close to full employment, not close to an employment level consistent with our mandate, and unless inflation were a significant concern, we wouldn’t dream of raising the federal funds rate-target,” Yellen said at the press conference in Washington.
Separately, the Fed released new forecasts showing more officials predicting the benchmark rate, now close to zero, would rise at least to 1 percent at the end of 2015 and 2.25 percent by the end of the following year, higher than previously forecast.
Yellen downplayed the quarterly forecasts, which are displayed as a series of dots on a chart.
“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 policies to the public at large,” she said, adding that the FOMC statement should take precedence over the forecasts.
“She really tried to talk it down,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York and a former Fed economist. “So I think the markets left saying, ‘Well wait a second, what are we supposed to listen to?’”
Stock benchmarks extended declines after Yellen, responding to a question, indicated that the federal funds rate might start to rise about six months after the central bank ends its bond-purchase program.
The FOMC statement repeated that the rate will stay low for a “considerable time” after asset purchases end. Asked how long that might be, Yellen said: “you know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing.”
The yield on the 10-year Treasury was up 10 basis points, or 0.10 percentage point, to 2.77 percent as of 4:15 p.m. in New York. The Standard & Poor’s 500 Index fell 0.6 percent to 1,860.77.
The Fed is overhauling forward guidance after unemployment declined toward 6.5 percent, its previous threshold for a rate increase, faster than policy makers predicted. Yellen last month told lawmakers the unemployment rate alone isn’t an adequate gauge of economic health and “there’s a great deal of slack in the labor markets still that we need to work to eliminate.”
The FOMC announced a $10 billion reduction in monthly bond buying to $55 billion and repeated that it will taper purchases “in further measured steps at future meetings.” At the same time, “asset purchases are not on a preset course.” The committee announced $10 billion reductions in purchases at the previous two meetings.
“Growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions,” the Fed said. Even so, “there is sufficient underlying strength in the broader economy to support ongoing improvement in labor-market conditions.”
The central bank’s preferred gauge of consumer prices climbed 1.2 percent in the year through January and hasn’t exceeded its 2 percent goal since March 2012. That gives policy makers “ample scope to continue to try to promote a return to full employment,” Yellen testified to lawmakers Feb. 27.
Minneapolis Fed President Narayana Kocherlakota dissented, saying the statement “weakens the credibility of the committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.”
Seventy-six percent of economists in a Bloomberg survey March 14-17 predicted the Fed would drop its unemployment threshold. Economists also predicted a $10 billion reduction in the monthly pace of bond purchases, according to the median of responses.
Yellen, 67, took over as Fed chair last month after three years as deputy to Ben S. Bernanke. In that role, she helped shape the communications policies the Fed wielded as it sought to nurture a recovery from the worst recession since the Great Depression.
After cutting interest rates to zero in 2008, the Fed embarked on large-scale asset purchases as well as forward guidance intended to convince investors that borrowing costs would stay low for a long time.
Starting in December 2012, the FOMC said the federal funds rate would stay low at least as long as unemployment was higher than 6.5 percent and the outlook for inflation didn’t exceed 2.5 percent.
With the jobless rate at 6.7 percent last month, that guidance was fast becoming obsolete.
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