2014 was “relatively easier,” as the pre-determined pace of tapering had The Fed on auto-pilot last year. However, as WSJ’s Jon Hilsenrath warns, Janet Yellen ’s job is about to get harder. Hinting that The FOMC is likely to remain “patient” in deciding when to start raising short-term interest rates later this year (and markets have started to price in lower for longer-er following recent macro weakness domestically and abroad). Juxtaposed against a mixed picture of the economy is concerns of being boxed in at ZIRP should another economic downturn arrive. However, as III Associates notes, it is the communications challenge for The Fed that is most problematic, “it has been nine years since the last rate hike, and I’d estimate about a third of those working on trading floors have never witnessed one.”
Janet Yellen ’s job is about to get harder after a relatively easy first year as Federal Reserve chairwoman.
She and her Fed colleagues on Wednesday are likely to repeat after a two-day policy meeting that they “can be patient” in deciding when to start raising short-term interest rates later this year—meaning no rate increases at their next gatherings in March or April.
But in the weeks ahead, she’ll face the challenge of forging consensus on whether to formally open the door to rates increases in June.
Many Fed officials have said they expect to start raising their benchmark short-term interest rate from near zero around the middle of the year. Ms. Yellen said last month that the “patient” language signals no rate increase for at least two meetings. That means if officials want to signal the possibility of a rate increase in June, they’ll need to alter or drop the phrase at the meeting March 17-18.
“These are going to be consequential choices that are going to involve subtle judgment about the economy and market, not just here but abroad, and that is a challenge,” said Lewis Alexander, chief U.S. economist at Nomura Securities.
In fed funds futures markets—where traders buy and sell contracts based on expected shifts in the Fed’s benchmark interest rate—participants have been marking down the probability of a Fed move by June.
“The kinds of things we’re observing now—it is not the constellation of data that would be consistent with a zero policy rate. I think it is important to get started and to start normalizing policy,” Mr. Bullard said in an interview last week.
Other officials have doubts. “Based on the data right now I’m not particularly confident [inflation will return to 2%]. That is exactly why I’m willing to be patient,” Boston Fed Eric Rosengren said in an interview. He said he was particularly wary of falling yields on 10-year Treasury notes, a signal that investors don’t see upward pressure on inflation.
However, no matter what, change is not good for the market (as we noted previously). As Hilsenrath concludes, Yellen’s first year in office demanded a great deal of planning, but not many nail-biting decisions… now she has a problem…
“The pace of tapering, $10 billion per meeting, precluded any other action in 2014, so last year was relatively easier,” said Karim Basta, chief economist at III Associates, an investment adviser. “The communications challenge of the first rate hike will be substantial in that it has been nine years since the last rate hike, and I’d estimate about a third of those working on trading floors have never witnessed one.”