It's Official: Federal Reserve Phraseology Is Devoid of Meaning

Janet Yellen on Sept. 17 Photograph by Andrew Harrer/Bloomberg

Federal Reserve policymakers reaffirmed today that they intend to keep short-term interest rates near zero for a “considerable time” after asset purchases end, which sounds like a forthright and important statement. Except that Fed Chair Janet Yellen, speaking to reporters, refused to be pinned down on how long a “considerable time” is. There is a sense that it’s more than a month and less than a year, but that’s guesswork on the part of Fed observers.

Back in March, when she was still new on the job, Yellen committed the central banker’s faux pas of actually answering a reporter’s question fully when asked what the rate-setting Federal Open Market Committee meant by saying it would keep rates low for a considerable time* after ending quantitative easing. Said Yellen: “So, I, 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.”

Yellen has since fuzzed up her language in the grand tradition of her predecessors. Give the journalists at today’s Fed press conference credit for trying to extract some specificity. Robin Harding of the Financial Times asked the Fed chair what a “considerable time” means, adding, “If it doesn’t have a defined meaning, what purpose is it serving?”
Yellen answered that the FOMC is “constantly discussing forward guidance,” noting that it did “a major overhaul” of its language in March. But she said linking the phrase to a certain period of time would be a bad idea. “Committee participants want to make sure that we have the flexibility, that the committee has the flexibility to respond to unfolding developments.”

What she means is that if the economy accelerates or inflation jumps sooner than expected, the Fed policymakers will want to move quickly to raise rates, and vice versa if the sluggishness drags on. Said Yellen: “They do not want to be locked into something that the markets see as a calendar-based and firm commitment. I agree with that.”

As Bloomberg reports, the Federal Open Market Committee as expected reduced its pace of bond purchases, staying on course to end the program in October. At the press conference, Yellen said, “The labor market has yet to fully recover,” adding that “inflation has been running below the committee’s 2 percent objective.” In July, the Fed said inflation was “somewhat closer” to its goal. Today the Bureau of Labor Statistics reported that consumer prices fell 0.2 percent in August, leaving them up just 1.7 percent over the past 12 months.

There were two dissents from the FOMC’s official statement, by Richard Fisher of the Dallas Fed and Charles Plosser of the Philadelphia Fed. Yellen said at the press conference that “I don’t consider two dissents to be an abnormally large number.”

*The current official phrasing is this: “The Committee continues to anticipate, based on its assessment of these factors [i.e., unemployment, inflation, and financial developments], that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

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