WWJD? (What Would Janet Do?)
By Rick Welch on February 25, 2015
What would Janet do? Over the past two days, Federal Reserve Chairwoman Janet Yellen has made the Fed’s plans for lifting interest rates a focus of her semiannual testimony to lawmakers in Washington. Her testimony yesterday before the Senate Banking Committee was followed today by an appearance before the House of Representatives Financial Services Committee. Continuing a pattern seen since her first days in office in early 2014, every suggestive word and phrase in her testimony this week has been parsed, examined and translated by the financial markets eager to uncover some signal or indication when short-term interest rates will begin the long climb back to normalization. And a long climb it will be from zero-bound up to the current Fed consensus estimated levels of 1.125% (2015), 2.5% (2016) and 3.625 (2017). As reported in the WSJ this morning, Ms. Yellen “is choosing her words carefully because she wants to avoid unsettling financial markets before she is certain of a move or change in monetary policy. In 2013, when her predecessor, Ben Bernacke, started discussing an end to the Fed bond-buying program (QE), stock prices fell sharply and yields on long-term bonds moved up, denting the then ongoing housing recovery.”
During her testimony, Ms. Yellen stated “that the employment situation in the US has been improving on many dimensions. If the economy continues to strengthen as anticipated and if Fed officials become more confident that low inflation will rise toward their 2% goal, the central bank will at some point begin considering an increase in the target range for the federal funds rate.” She continued by “repeating the promise to be patient, but this time she presented the idea of moving beyond it as well, saying that before rates increase, the patient theme would be revised. In dropping the reference to patient from its statement, Ms. Yellen sought to dispel the notion it would mean rate increases were certain or imminent. She calmed the markets by testifying that “it is important to emphasize that a modification of the interest rate guidance should not be read as indicating that the Fed will necessarily increase the target rate in a couple of meetings. Instead, a change in the language would be put on the table for discussion. The modification should be understood as reflecting the Fed’s judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting.”
In the weeks immediately following her news conference last September 17th, we focused on the phrase considerable time which she used to describe the time frame for a possible rate hike. At the time, this suggestion defied the expectations of many economists who thought the September FOMC meeting was the proper forum to clarify or dial back such language in preparation for monetary policy tightening in 2015. In December we learned that the Fed “will be patient in the beginning to normalize the stance of monetary policy and sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 0.25% target range for a considerable time or at least two FOMC meetings away or until after the March 17-18, 2015 meeting.”
Most analysts predict the first, long anticipated, rate hike could occur in June or, more probably in September. We will continue to advise our clients not to fear the Fed. When (not if) tightening occurs, that should be affirmation that the domestic economy has recovered to the point where it is strong enough to withstand the shocks of external forces and pressures (a slide in crude prices, a strengthening US dollar, a slow growing Europe and a weakening Russia are examples). When tightening does begin, it is most likely to be gradual however even a plan of gradual tightening can upset the financial markets.
