Federal Reserve Chair Janet Yellen says she doesn’t disagree with her predecessor on the substance of monetary policy. She does differ in style, which may prove important if the market reaction to her debut press conference is indicative.
The 67-year-old was more relaxed, direct and expansive than Ben Bernanke in handling questions from reporters on March 19, according to long-time Fed watchers. She referred to adult children “shacking up” with their parents because they can’t find work, suggested that comments by New York Federal Reserve President William C. Dudley were “very extreme” and used almost 600 words to answer a question about the job market.
“She was pleasant and didn’t evade any of the questions,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co in New York. “She was more direct.”
That’s what got her into trouble with the financial markets. Stock and bond prices sank after Yellen indicated that the Fed might start raising interest rates about six months after it ends its asset-purchase program late this year. While equities recovered their losses yesterday, bonds did not. The two-year note yield was little changed at 0.42 percent Thursday after gaining seven basis points March 19, the most since 2011.
Yellen acknowledged at the press conference that getting the Fed’s message across to the markets isn’t easy. “We will try as hard as we can not to be a source of instability,” she said, recalling the turmoil in financial markets last year after Bernanke first suggested the Fed might begin to scale back its monthly bond buying.
She said she feels the “weight of responsibility keenly” for the Fed’s actions now that she has made the move up to the No. 1 position from her previous role as vice chair. “Now in many ways I feel the buck stops with me,” she said.
As lieutenant to Bernanke, Yellen was a leading proponent of easier monetary policy, arguing forcefully that the central bank needed to do more to spur economic growth and bring down employment. Now, as chair, she has to reflect the views of an at times fractious Federal Open Market Committee that is split between hawks who want to raise rates soon and doves who favor continued monetary ease.
“That is a difficult challenge,” Feroli said.
The mixed message that Yellen presented at her press conference was an attempt to balance the two wings of the committee, according to Marvin Goodfriend, a former Fed official who is now a professor at Carnegie Mellon University in Pittsburgh. While the Fed chair suggested the central bank might tighten credit sooner than many investors had expected, she also said any rise would be gradual.
“She split the difference to buy off the hawks while accommodating the doves,” he said.
Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore, said he suspected that “Yellen’s own inclinations are on the dovish side.”
“In the press conference, she made eloquent arguments about the existence of considerable labor-market slack,” said Wright, who worked at the Fed’s division of monetary affairs from 2004 until 2008. “But she chairs a committee that works by consensus and has several members who seem in a hurry to end asset purchases and raise short rates.”
Yellen also had her work cut out for her because she had to explain a major revamp in the Fed’s policy statement that was made necessary by a faster fall in unemployment than policy makers had projected. At 6.7 percent in February, the jobless rate was closing in on 6.5 percent, the threshold that the Fed had set for the consideration of tighter credit, at the same time that the central bank was continuing to ease policy through bond purchases.
In place of that quantitative guidance, the central bank adopted a more qualitative approach, saying it “will take account of a wide range of information, including measures of labor-market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments” in deciding when to raise rates. The Fed’s target for the federal funds rate — the rate that commercial banks charge each other for overnight loans — has been at zero to 0.25 percent since December 2008.
Former Fed Vice Chairman Alice Rivlin said she thought some commentators were “over-analyzing” Yellen’s remarks and looking for “tell-tale signs between the tea leaves.”
“She conveyed that they aren’t just looking at the 6.5 percent,” Rivlin said, referring to the Fed’s previous jobless threshold. “The situation in the labor markets is much more complicated than that.
‘‘I didn’t see anything to really change the guidance’’ on interest rates, added Rivlin, now a senior fellow at the Brookings Institution in Washington.
The Fed also decided this week to continue with its plan to reduce its monthly bond purchases by $10 billion at each FOMC meeting. Dudley said in New York on March 6 that the bar to changing that strategy was ‘‘pretty high,’’ suggesting that economic growth would have to speed up to 5 percent or slow to zero to prompt an alteration.
‘‘Those are very extreme numbers,’’ Yellen said, when asked about the New York Fed president’s remarks. ‘‘I wouldn’t go to such extremes.”
Even before Yellen opened her mouth at the press conference, she was put on the spot by the Fed’s release that day of policy makers’ own projections for interest rates. Those new forecasts showed more officials predicting the benchmark rate would rise at least to 1 percent at the end of 2015 and 2.25 percent by the end of 2016, higher than previously predicted.
Those projections contrasted with the FOMC statement, which said the shift in rate guidance “does not indicate any change in the Committee’s policy intentions” — an assertion that Yellen repeated to reporters later.
“She got dealt a really bad hand,” said Lou Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based unit of ICAP Plc, the world’s largest broker of financial transactions between banks.
He reckoned that about two-thirds of the decline in prices of shorter-dated Treasury securities on March 19 came in response to the higher rate forecasts, with the rest occurring after Yellen indicated the Fed might start to tighten credit sooner than many investors had expected.
Yellen downplayed the quarterly predictions, which are displayed as a series of dots on a chart.
“One should not look to the dot-plot, so to speak, as the primary way in which the committee wants to or is speaking about policies to the public at large,” she said, adding that the FOMC statement should take precedence over the forecasts.
“She really tried to talk it down,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York and a former Fed economist. “So I think the markets left saying, ‘Well wait a second, what are we supposed to listen to?’”
What really caused some investors to react were Yellen’s comments on the timing of the first rate increase. The FOMC said in its statement that it expected to maintain the funds rate near zero “for a considerable time after the asset-purchase program ends.” When asked what that meant, the Fed chair said that was “hard to define, but, you know, it probably means something on the order of around six months or that type of thing.”
She then went on to say that the rate liftoff depends on how the labor market and inflation evolve.
“If we have a substantial shortfall in inflation, if inflation is persistently running below our 2 percent objective, that is a very good reason to hold the funds rate at its present range for longer,” she said. The Fed’s favored measure of inflation was at 1.2 percent in January and hasn’t exceeded the Fed’s 2 percent goal since March 2012.
Philip Orlando, chief equity-market strategist for Federated Investors Inc. in New York, said Yellen should have followed the example of former Fed chairman Alan Greenspan and not replied so directly to the question.
“She needs to learn to be more Greenspan-esque, more ambiguous,” he said.
Greenspan described his approach after becoming Fed chairman in 1987 to a congressional committee: “Since I have become a central banker, I have learned to mumble with great incoherence,” he said, adding: “If I seem unduly clear to you, you must have misunderstood what I said.”
That’s not Yellen’s style. As vice chair, she spearheaded efforts to make the Fed more open and transparent.
“We will continue to try to communicate as clearly as we possibly can,” she told reporters this week.
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