Yellen's Patience Echoes Greenspan 2004 Run-Up to Rate Liftoff

Federal Reserve Chair Janet Yellen is taking a page from predecessor Alan Greenspan’s 2004 playbook, a step that appears to validate the expectations of investors who expect interest-rate liftoff in June 2015.

The Fed has replaced a vow to hold rates low for a “considerable time” with a commitment to be patient on the timing of any increase.

The move recalls an episode almost 11 years ago, when then-Chairman Greenspan began steering the policy-setting Federal Open Market Committee toward an interest-rate increase six months later.

“The use of the 2004 playbook is not coincidental,” Roberto Perli, a partner at Cornerstone Macro in Washington and a former associate director of monetary affairs at the Fed, wrote in a research note. “It means the FOMC is comfortable with investors inferring that things will play out as in 2004, when rates went up in June.”

Yellen told a press conference after the FOMC meeting that “the statement that the committee can be patient should be interpreted as meaning that it is unlikely to begin the normalization process for at least the next couple of meetings.” She then said “a couple means two.” The next two meetings are in January and March.

In June 2003, Greenspan’s Fed cut rates to 1 percent, and in August of that year, it started to assure investors that borrowing costs would stay low for a “considerable period.”

The following January, the FOMC replaced the phrase with a reference to the committee’s “patient” stance on rates, and it left that language intact at the following meeting in March. In May, while it left rates at 1 percent, it dropped “patient” and said it expected accommodation could be withdrawn at a “measured” pace.

June Liftoff

The Fed raised rates by a quarter percentage point to 1.25 percent at the next meeting, on June 30, 2004, beginning a cycle of tightening in quarter-point increments at every meeting through June 2006, when the benchmark rate reached 5.25 percent.

Asked during the press conference yesterday about the measured-pace experience, Yellen discouraged the notion that the episode would be repeated.

“Participants have said that they think policy should be based on the actual evolution of economic activity and inflation, which tends to be variable over time, and that’s why I say I anticipate it will be data-dependent,” she said.