Yellen makes Federal Reserve debut

Janet Yellen’s debut didn’t say anything out of the ordinary, but apparently, investors didn’t care for her commentary.

The Wall Street Journal story by Jon Hilsenrath and Victoria McGrane led with investor reaction to Yellen’s comments around when the Federal Reserve might start raising interest rates:

Investors bristled after Janet Yellen emerged from her first meeting as Federal Reserve chairwoman with some unsettling signals about the central bank’s outlook for short-term interest rates.

The Fed intends to keep short-term rates near zero into next year, but investors sniffed out signs that rate increases might come a bit sooner and be a touch more aggressive than expected. Even though the Fed’s official policy statement sought to give assurances of continued low rates far into the future and Ms. Yellen played down rate-increase expectations, stock prices fell and longer-term rates on Treasury bonds moved up.

In a press conference after the meeting, Ms. Yellen suggested that interest-rate increases might come about six months after the bond-buying program ends—a conclusion that could come this fall. She offered that projection with many caveats, but some investors took it as a sign that the Fed could start raising interest rates sooner than expected.

“This could have been a rookie gaffe on Yellen’s part,” Paul Edelstein, director of financial economists at IHS Global Insight, said in a note to clients. “This was, after all, her first press conference.”

In futures markets, prices indicated investors’ expected rate for the Fed’s benchmark federal funds rate for June 2015 moved up from 0.28% before the Fed’s meeting to 0.36% after the meeting.

Writing for Bloomberg, Craig Torres, Steve Matthews and Michelle Jamrisko also led with investor reaction:

Janet Yellen said the Federal Reserve wasn’t altering policy when it overhauled the way it signals changes in borrowing costs. Investors didn’t buy it.

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.

Binyamin Appelbaum’s story in the New York Times led with the announcement and added this background about the statement:

The latest statement — the longest one the committee has ever published — was careful to say that the change in guidance was not intended to alter the possible timing of a rate increase. Instead, Ms. Yellen said that new measuring sticks were necessary because the unemployment rate had fallen more quickly than expected, while other economic indicators, like inflation, remained weak.

“The purpose of this change is simply to provide more information than we have in the past, even though it is qualitative information, as the unemployment rate declines below 6.5 percent,” Ms. Yellen said.

But the Fed also released a separate set of economic forecasts showing that officials had raised their expectations for the level of their benchmark rate at the end of 2015 to 1 percent from 0.75 percent.

The Washington Post story by Yian Q. Mui led with the notion that the Fed way paving the way to increase rates:

The Federal Reserve began laying the groundwork Wednesday for the first increase in interest rates since the Great Recession upended the economy.

The nation’s central bank said it will consider a broad swath of indicators to determine the moment of liftoff, including job market data, inflation expectations and financial developments. The official statement was a retreat from the blanket assurances that rates would remain untouched, which have dominated the Fed’s message for the past five years. Instead, the debate has shifted to how much longer the Fed should wait before pulling the trigger.

The Federal Reserve began laying the groundwork Wednesday for the first increase in interest rates since the Great Recession upended the economy.

The nation’s central bank said it will consider a broad swath of indicators to determine the moment of liftoff, including job market data, inflation expectations and financial developments. The official statement was a retreat from the blanket assurances that rates would remain untouched, which have dominated the Fed’s message for the past five years. Instead, the debate has shifted to how much longer the Fed should wait before pulling the trigger.

No matter how the story was framed, it was a stumble for Yellen. Much of the earlier coverage anticipated that she would have an easy debut, especially since the Fed has clearly projected its moves to the markets. The fact she rattled the markets with her post comments shows that she has some work to do, despite her years of experience and knowledge of the markets.