Investors overreacted to Yellen's comments

The Fed chair's statement was hedged to within inches of meaninglessness. The last thing she wanted to do was make news.

By The Fiscal Times Mar 20, 2014 12:11PM

Caption: Federal Reserve Chair Janet Yellen
Credit: © Cliff Owen/APBy Rob Garver, The Fiscal Times


For a Federal Reserve Board chair, there are many rites of passage. There's the first rude question from a lawmaker during a confirmation hearing. There's the first Federal Open Market Committee meeting. And of course, there's the first market-shaking slip of the tongue. 


Janet Yellen (pictured) rattled the markets for the first time on Wednesday in her first post-FOMC press conference. 


She suggested that the Fed might consider raising interest rates "around six months" after it winds down its current practice of purchasing Treasury and mortgage-backed securities sometime later this year. And stocks tumbled, with the S&P 500 index ($INX) dropping by more than a full percentage point before recovering to close 0.61 percentage points off the open. Bond yields spiked as investors anticipated higher interest rates. 


To be clear, this was silly. Yellen's statement, taken in context, was qualified, hedged and caveated to within inches of meaninglessness. But when a Fed chair speaks, the combination of media hype and a market that appears to have only passing acquaintance with rationality makes for reactions that are swift, decisive and frequently wrong.


Just think back to last May. Ben Bernanke, Yellen's predecessor, made comments in testimony before Congress that the markets interpreted as signaling a change in the central bank’s asset purchase program. Bernanke's comments at a press conference the next month reinforced those impressions. Interest rates on home mortgages spiked, and the Fed had to spend a considerable amount of time assuring the market that it wasn’t planning any dramatic moves, which it wasn't. When the Fed finally did begin tapering asset purchases, the market barely reacted at all. 


Should Yellen have said something as concrete as "around six months?" No, probably not.


"The more experienced Bernanke knew to avoid clarifying deliberately vague statement language," J.P. Morgan economist Michael Feroli wrote afterward. But that doesn't make the market overreaction to her statement any more sensible. 

Given the fragile state of the U.S. economic recovery, here's a good rule of thumb for listening when Fed chairs talk: If you think they said something surprising, consider whether you misunderstood them or they misspoke. The last thing Yellen intended to do in her press conference Wednesday was make news. In fact, she stressed multiple times that nothing that she was saying should be taken to mean the FOMC was changing its policy outlook in any way whatsoever. 


In the documents released along with the standard FOMC statement, the Fed included a bar graph showing when FOMC members believed it would be appropriate to begin the process of "policy firming." One member voted for 2014, 13 members voted for 2015, and two members voted for 2016. Compare that to December, when 4 members voted for 2014, 13 for 2015, and one for 2016, and you could make an argument that the FOMC is marginally less hawkish, on the whole, about when to firm up rates. 


Here's another reason why it might be premature to stress out about when the Fed will raise rates: Yellen was very clear that "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."


The members of the FOMC, on average, expect inflation to remain below 2 percent through 2015 and not a single one of them predicts inflation above 2 percent at year-end 2016. 


Ironically, Yellen's "six months" comment came in the context of an FOMC meeting in which policymakers purposely removed a key quantitative measure from the forward guidance they provide the markets. In 2012, the FOMC said that it would treat 6.5 percent unemployment as a threshold beyond which it would consider raising interest rates. 


Yellen explained that the committee believed that the 6.5 percent threshold had outlived its usefulness. "Progress in the labor market has been more rapid than we anticipated," Yellen said, "while the rate of inflation has remained lower than the committee expected."


The indication the FOMC gave yesterday is that it will move to more qualitative forward guidance, meaning that "around six months" might be the last quantitative statement we get out of Yellen in a long time. 


More from The Fiscal Times

19Comments
Mar 20, 2014 2:45PM
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I can't wait to see what will happen when the market will have to be judged on its fundamentals (revenues, profits, etc.) without  the support of the printing of all the funny money and interest rates rise a little bit.  Because, if you haven't noticed, the overall economy is still pitiful and a lot of businesses are only making their profit numbers by laying off employees and cutting other expenses.  This will be fun!
Mar 20, 2014 3:25PM
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Her statement should have been a little more clear like this: As of right now QE is ended and short term interest rates will be allowed to rise to market levels. That's right. Ha Ha I fooled all of you. You thought I was just another money printer like those idiots Bernanke and Greenspan. Now bankers, get out there and actually do some real work for a change instead of living off the backs of Americans! With that she should have turned and gave Jamie Diamond a good swift kick in the rear. Then she'd be my hero! 

Mar 20, 2014 3:11PM
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Zero interest rates has suspended the law of financial gravity for banks. It allows them to buy assets, speculate, and manipulate markets with free money never earned by anyone. Without zero rates, they can't manipulate. I doubt they will ever give up this ability willingly as the free "profits" are just too good to pass up.

Mar 20, 2014 3:10PM
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She will go on with the give away to the banks and wall street. The poor people that have saved a little money looking for some interest return are still getting nothing even with Ben gone!! The Fed today is in debt over $4trillion and going in debt more everyday. Who will pay for this bull?
Mar 20, 2014 3:30PM
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How is she going to gauge which way monetary policy should go when the numbers are flawed and the way we calculate GDP is different from any other country in the world. The same way we changed the way bank assets are accounted for to hide their insolvency, we are cooking the economic numbers to inflate the GDP.

Mar 20, 2014 3:36PM
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I've listened to her now a couple of times on tv and she just doesn;t strike me as being that bright.  Must have been a sizeable donor to the Obamanation campaign.  Day after day, this country continues to slip further and further into the big lake of insignifigance becuase of unqualified people in government leadership roles.
Mar 20, 2014 2:33PM
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I hope she speaks up next week~! 

 

we get paid tomorrow and I suspect the 401K people will be blowing my cash about then.  maybe i'll catch a sale?  or sail?

Mar 20, 2014 4:13PM
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 So this solidly not a bubble market is hanging on the Feds words because why? They are collecting welfare from the fed maybe?
Mar 20, 2014 6:33PM
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If the Fed stops printing there will be no money to buy our U. S. Treasury bonds and our Gov. will have to raise interest yields on these bonds to entice people who actually work for their money to buy these bonds, we are 17+ trillion in debt., if you do the math and interest rates go up our Gov. will never be able to afford this, what happens next is anyones guess

Mar 20, 2014 3:45PM
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She just wanted to be regarded as simply "Chair" to be sit on. Also, How could anyone or anything should relying on the Chair for their stock investment? You know sooner or later there won't be the Fed to pump in the Fake Dollars into propping up the Market. Ahhhhhhh. Stupid as stupids think.
Mar 20, 2014 12:59PM
Mar 20, 2014 4:21PM
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Perhaps she just couldn't weave the lie that ole benny could? She's an obama worker she'll learn from the best.
Mar 20, 2014 3:54PM
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Send a woman to do a man's job and see what happens.......just like putting a eunuch in the White House, it isn't working out very well (except for Vlad!).
Mar 20, 2014 1:06PM
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Even the Nazis on Fox thought investors overreacted.Usually the idiots on Fox can`t get any

concept right.

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