Federal Reserve Board Chair Janet Yellen may have added some confusion into the debate over when the Federal Reserve will raise rates during her testimony to the Senate Banking Committee. She’s certainly making sure people have to pay attention to her comments.
The Wall Street Journal’s long-time Fed guru Jon Hilsenrath had these details in his story:
Federal Reserve Chairwoman Janet Yellen , sounding upbeat about the economy, laid the groundwork for interest-rate increases later this year.
“The employment situation in the United States has been improving on many dimensions,” Ms. Yellen told the Senate Banking Committee on Tuesday, her first of two days of semiannual testimony before lawmakers. Spending and production had increased at a “solid rate,” she added, and should remain strong enough to keep bringing unemployment down.
If the economy continues to strengthen as the Fed anticipates and officials become more confident that low inflation will rise toward their 2% goal, she said, the central bank “will at some point begin considering an increase in the target range for the federal funds rate.”
With that assessment, Ms. Yellen took an incremental step, shifting the central bank away from promises that interest rates will stay low and toward a discussion of when and how fast they will move up.
Her comments before the Senate panel signaled the Fed still doesn’t expect to raise its benchmark short-term rate from near zero at its March or April meetings. Many Fed officials have said in recent weeks that a midyear rate increase should be on the table, though not certain. Ms. Yellen sought to put the Fed’s shifting pronouncements about rates into perspective.
Sam Fleming wrote for The Financial Times that Yellen’s remarks could add some confusion about the Fed’s intentions:
The impending change in guidance — which analysts think could come as soon as the Fed’s next meeting in March — suggests the central bank wants to give itself maximum flexibility to set monetary policy, rather than finding itself bound by date-dependent pledges.
This would mark a clean break from the Fed’s current practice, under which it has been reassuring markets that it will be “patient” before lifting rates, meaning it will wait at least two further meetings before acting.
That language was a twist on previous wording assuring markets that rates would stay low for a “considerable” period — which itself marked an evolution from earlier forms of low-rates guidance tied to the unemployment rate, and to a fixed time period.
The shift will inject greater uncertainty into markets that have been pumped up by the more than six years of ultra-low interest rates. It should also avoid a re-run of the rate rise cycle of the mid-2000s, when the Fed felt locked into making quarter-point increases in every meeting.
George Magnus, an author and former chief economist at UBS, said greater unpredictability was welcome. “The Fed doesn’t want to cosset financial markets in the way it has done until now,” he said. “This is reverting back to a position where they want to tell the market it should be pretty much on standby for a change in monetary policy as and when the Fed thinks it is merited.”
Paul Davidson wrote for USA Today that Yellen was trying to hedge her signals to the market:
But she cautioned that removal of the “patient” wording in an upcoming statement would not mean the Fed “will necessarily increase” rates within two meetings. Rather, she said it would indicate the economy has improved “to the point where it will soon be the case” that a change in interest rates “could be warranted at any meeting.”
The caveat is an attempt to prevent a sell-off in Treasuries and rising yields if the Fed drops the assurance in its March post-meeting statement, says economist Paul Ashworth of Capital Economics.
Yellen offered no clear signal on when the Fed will raise its benchmark rate from near zero for the first time since the 2008 financial crisis. But she indicated policymakers could act before unusually low inflation picks up.
“Provided that labor market conditions continue to improve,” the Fed will increase the federal fund rate when it’s “reasonably confident that inflation will move back over the medium term toward our 2% objective,” Yellen said in her semiannual report to Congress.
Yellen said the labor market “has been improving along many dimensions,” her most positive assessment in recent memory. The unemployment rate, she noted, has fallen to 5.7% from 10% in 2009 and the ranks of long-term unemployed have “declined substantially.” She also said there are fewer part-time workers who prefer full-time jobs
The BBC reported that Yellen remains cautious about actually raising rates:
The Fed’s chief said that while the US economy was improving, the US employment situation was still fragile.
“Too many Americans remain unemployed or underemployed… wage growth is still sluggish,” she said.
Her comments helped propel US shares to fresh highs – the Dow and S&P 500 both closed at records.
Investors are not eager for the Fed to begin tightening anytime soon and a rate rise before June seems unlikely, as Ms Yellen also warned of weaknesses abroad.
In her semi-annual testimony in Congress she said: “Foreign economic developments, however, could pose risks to the outlook for US economic growth,” she told Congress, focusing specifically on a slowdown in China as well as the struggling eurozone.
But she added that efforts to stimulate growth in the eurozone could ultimately help the US economy, and she noted that declining oil prices could provide a boost to US economic output.
No matter what, investors are certainly closely watching her testimony as well as the economy for clues about when the Fed will make a move. It will certainly be a big shift from recent policy and a more normalized rate will likely be good for the economy.
