Janet Yellen’s rookie year started with a rookie blunder, but should we panic?
At just her first press conference since taking office, new Fed Chairman Janet Yellen made her first rookie mistake — being vaguely specific when the situation called for being specifically vague.
At last month’s meeting, the Federal Open Market Committee decided to scrap the Evans Rule, as expected, which served as a forward guidance policy by setting 6.5 percent as the lower threshold for unemployment that would determine when the Federal Reserve would stop suppressing interest rates.
But with the Evans Rule scrapped, the obvious question became: well, how much longer will the Fed suppress interest rates?
In an attempt to be deliberately qualitative (i.e. vague), the FOMC stated in a press release following the meeting that they would now attach forward guidance to an indeterminate time after the end of QE: “The Committee continues to anticipate … that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends,” further noting that it would maintain suppression “especially if” projected inflation continues running below 2 percent.
What a way to not pin yourself down to much of anything, eh? “Considerable time,” as in a year? Three years? More? And, as we know from the meeting minutes released this month, the move away from any sort of a quantitative forward guidance policy was certainly deliberate.
But at the press conference following the meeting, Yellen’s first, she was asked what exactly the FOMC meant by “considerable time,” to which Yellen replied “it probably means something on the order of around six months or that type of thing. But, you know, it depends, what the statement is saying is it depends what conditions are like.”
Oops! (Notice that Yellen quickly backtracked in an attempt to obscure any clarity she brought at that moment.)
Following the press conference, interest rates rose and stocks fell as the bogeyman reared its head. Would it really only be six months after tapering quantitative easing that the monster would finally come out from under the Fed?
Well, it’s certainly worth considering as, either way, interest rates won’t be suppressed forever, but we certainly shouldn’t consider the six-month comment as even a soft rule, especially if economic indicators remain poor. If we’ve learned anything, it is that the FOMC won’t be pinned down to anyone’s word, even their own.
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Reg Clodfelter is a reporter with Institutional Real Estate, Inc.
