Market watches closely as Yellen meets the press
The Fed chair is set to talk to the media Wednesday afternoon, and could lay out the economy's path forward.
Most of the suspense surrounding this week's meeting of the Federal Open Market Committee has less to do with the Fed's asset purchase program (it will likely continue the "taper" by again slowing the pace of its purchases) or interest rates (they will hold them steady).
It has everything to do with how Fed Chair Janet Yellen articulates the path forward in her first meeting with the press Wednesday afternoon.
In guidance released last year, the central bank sought to calm market concerns about potential interest rate increases by laying out a quantitative threshold that committee members would be watching as they considered whether it was time to start raising interest rates again. Instead of just promising that interest rates would stay close to zero until, say, mid-2015, the Fed signaled it would hold steady until the unemployment rate had fallen to 6.5 percent as long as inflation also didn't rise above 2.5 percent.
That unemployment figure is now within sight. The economy could easily reach it with a month or two of solid job creation, given that the rate currently stands at 6.7 percent.
The Fed, being the Fed, has been very careful about the language officials have used when discussing interest rate policies, and they have been quite clear that the 6.5 percent figure is a threshold, not a trigger for action. More recently, the bank's policymakers have made clear that they will keep rates low well past the point that threshold is reached.
So nobody expects a sudden spike in interest rates coming out of this week's two-day meeting or, indeed, any time this year. But businesses and investors plan for the long-term as well as the short-term, and Yellen will have to address the impact falling unemployment has on the FOMC's thinking, even if actual policy movements are unlikely in the near term.
It’s clear that Yellen will have to lay out a new way to signal the Fed's intentions -- something more qualitative and open to interpretation -- than relying on a hard number that could cause the market to make assumptions about imminent interest rate moves. The central bankers have already shifted their emphasis to that so-called "forward guidance," but markets and Fed watchers will be eager to hear more about just what indicators Yellen and her colleagues will be watching.
Michael Feroli, a research analyst at J.P. Morgan, predicted that Yellen would use the FOMC's post-meeting statement, as well as her meeting with the press to help smooth the transition from quantitative to more qualitative guidance.
"Recent Fed-speak has increasingly focused on what Atlanta Fed President Lockhart has called the 'shadow labor force,'" Feroli wrote in a research note. "In particular, the statement could begin to reference a desire to see lower levels of part-time employment for economic reasons and in measured marginal attachment to the labor force, such as discouraged workers."
Analysts at Nomura Securities said that while they expect the FOMC to jettison most of the quantitative aspects of forward guidance, they believe policymakers will retain language indicating that they "will maintain a low interest rate if projected inflation continues to run below the committee's 2 percent longer-run goal."
The need for the Fed to adjust its forward guidance, interestingly, comes just a week after the influential Bank for International Settlements published a paper calling into question the overall usefulness of forward guidance as a tool.
The paper concluded, "The recent increased reliance on forward guidance has been helpful in clarifying policy intentions in highly unusual economic circumstances. However, the mixed evidence concerning the effectiveness of these practices, and the challenges they raise, caution against drawing firm conclusions about their ultimate value."
Given that Yellen was an early supporter of aggressive forward guidance from the Fed, and that she has signaled that policies under her leadership will be largely consistent with those under her predecessor, Ben Bernanke, whatever the market hears on Wednesday will likely reflect a change in nuance rather than a change in overall philosophy.
More from The Fiscal Times
- These Top Economists All Agree on the Biggest Problem the U.S. Face
- The Disturbing Economics of America’s Sex Trade
- Want a Secure Retirement? Head to the 'Cowboy State'
Let's see....Think most of you saw or witnessed the last couple changes....? Maybe not..??
The Bond buying and/or QE dropped from $85 Billion to 75...We are all still here, nobody died.
The Bond and QE dropped again to $65 bill from 75...Wheww, we made it..
The U.S. didn't fold up like a cardboard box...
None of us went broke...
The Economy is getting better...
The Markets are doing pretty good, and moving to NEW highs...
MAYBE SOME of you NAYSAYERS, could explain that to our little group, seems many of you are DEAD WRONG so far.
huge inflection point these next couple days. either we power upwards and get some rally confirmation or the right chart shoulder collapses and the market goes in for not only rotator cuff surgery but possibly a shoulder replacement ...
keep the lights on ...
The difference Active between you and several commenters.....
Is you, analyze and have some actual figures, that make a point or reference to charting or history..
But then we have too many idiots that are just blowing shidt, about all the problems of a President, the FED, the Economy and the "phony Markets"...Along with lines in the Sand, Benghazi and or a piss ant named Putin...I listen to or pay very little attention to all that crap..
I come here to check Markets and Watch Lists and read Articles that may pertain to my interest...
Not to discuss "rabid partisan politics", it's a waste of my time, and belongs somewhere else.
So for the most part I just roll or scroll on by...
RE-TOG:You`re right.The market didn`t tank just because the QE easied.The bears were wrong
as usual.The Weekly Stand was saying what an idiot Bernanke was as Fed chief.He was playing
chess while the bitter far right can only play checkers.The economy is a lot stronger than the right
knows or wants to admit.
Being about 25 points away, I can almost taste that Crown Royal...Remember...??
It wasn't about Champagne, we have 3-5 different bottles from different years here.
It's obvious that we never can seem to finish off the Grape stuff, and I even make some about every couple years...Have a small Arbor that produces up to, two bushels sometimes.
Would be the first to agree we are on shaky ground and a new territory of highs, coming off a slow down or slight stagnation of a recovery; Not even counting the possibility of draining off QE.
I kinda hope Yellin, keeps the Media guessing this afternoon, and says little to disrupt upper movement and slight momentum.
Noticed that Account deficits have dropped on trade for the past months or month?
We are under the 2.0 factor...That is good...Job's picture looks better...And housing starts are a little muted...Oh well, no one said it would be easy..
The Copper thing is a little discerning, and wondering about China in more ways then one...
Haven't checked lately, but besides demand, China might be overproducing copper also..?
Outside of that, there has been less demand on the metal, because of a stagnation of industries that utilize it in manufacturing, unless they are replacing it with another product.
Gold and gold miners have been up along with Silver (some)...
More than likely because of Eurozone and Mid East Strife...Along with "hinting inflation." IMO.
Copyright © 2014 Microsoft. All rights reserved.
'We're not exactly in a uniformly strong market,' says the notably pessimistic newsletter publisher.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.