Yellen's Flip-Flop Isn't Guidance
In the middle of last year, when quizzing Bank of England Governor Mark Carney about when interest rates might rise, Labour Member of Parliament Pat McFadden accused him of "behaving a bit like an unreliable boyfriend; one day hot, one day cold. And the people on the other side of the message are left not really knowing where they stand." The jarring combination of last week's Federal Reserve decision to keep rates unchanged and Thursday's speech on what happens next makes Janet Yellen his equivalent as an unreliable girlfriend.
Last week, Yellen told the Fed's post-meeting press conference that "in light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence." In a speech Thursday, she said “most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year." While Yellen and her peers have come a long way since the days when setting policy was a deliberate exercise in opacity, they're guilty of flip-flopping so often that their efforts to direct expectations have become discredited.
To be fair, the current economic backdrop to monetary policymaking is even more opaque than usual with China in a funk, emerging markets looking vulnerable, the outlook for faster inflation non-existent at the same time as the U.S. labor market appears to be in rude health. Nevertheless, the forward guidance policy adopted in recent years by many central banks is in tatters, and is probably doing more harm than good in telling companies and consumers when borrowing costs are likely to rise and at how fast.
Yellen's flip-flop probably means a wave of Wall Street revisions to their Fed forecasts today and next week. Citigroup Inc. economist William Lee, for example, this week shifted his lift-off call to spring 2016; in June, he'd placed his bet on September, after previously anticipating a December move. "It all seems a very long way from the simple certainties of the era of forward guidance based on one domestic variable, the U.S. unemployment rate," Lucy O'Carroll, the chief economist at Aberdeen Asset Management, wrote this week even before Yellen's speech further muddied the waters. "No wonder markets -- and economists -- seem a little confused."
Economists polled by Bloomberg are predicting a continuous path of interest rate increases, with one quarter-point move per quarter between now and the end of next year:
The deadly combination of the capricious central bank communications and an economic outlook that looks like it could turn on a dime and slide into recession, though, makes trying to predict the future even harder than usual. So don't be surprised if, in the coming quarters, the chart above bears no relation with the reality of what happens to the U.S. Fed funds rate.
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