The Fed Shouldn't Watch the Calendar

The U.S. Federal Reserve faces a daunting task as it moves away from near-zero interest rates: communicating its plans without unduly shaking up financial markets. The job would be easier if everyone involved recognized that the central bank's actions must depend on the state of the economy, not on the calendar.

Consider what happened in July 2015, when Chair Janet Yellen gave a policy speech in Cleveland. Out of almost 3,800 words on various subjects, the financial media focused on the following: “Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” Although Yellen specified that any move would depend on the data, the headlines cried out: The federal funds rate will finally leave the zero lower bound by the end of 2015.