Yellen's remarks at her first news conference as the head of the
central bank pointed to a more aggressive path toward higher
interest rates than many had anticipated, and bets in financial
markets shifted accordingly.
The comments came after a two-day meeting in which Fed officials
made another reduction in their bond-buying stimulus and decided to
jettison a set of guideposts they were using to help the public
anticipate when they would finally raise rates.
The Fed said the change in its rate hike guidance did not mark a
shift in its intentions and that it would wait a "considerable time"
after shuttering its asset purchase program before pushing borrowing
Yellen, who had fielded numerous questions without a hitch,
hesitated when asked what the Fed meant by "considerable."
"I — I, you know, this is the kind of term it's hard to define,
but, you know, 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."
Several analysts wondered whether her answer was an unintended slip,
given the deliberately vague language of the Fed's statement.
Either way, the reaction in financial markets was swift and sharp.
Prices for U.S. stocks and government bonds added to earlier losses
triggered by fresh Fed forecasts that showed policymakers are
inclined to raise rates a bit more aggressively than they had been
just a few months ago. The U.S. dollar rose.
"The forecast change could be interpreted as a relatively hawkish
shift ... and as such the general market reaction seems
well-founded," said JPMorgan economist Michael Feroli.
Futures traders moved to price in a first interest rate hike as soon
as April 2015. Previously, it was July.
Most top Wall Street economists, however, continued to see the first
rate hike in the second half of 2015, according to a Reuters poll.
Yellen sought to use her news conference to emphasize that rates
would stay low for awhile and rise only gradually. She also said
they could end up staying lower than normal "for some time" even
after the jobless rate drops to a healthy level.
The Fed would look not only at how close inflation and unemployment
are to its goals, but how fast, or slowly, those measures are
approaching those goals, she said.
At 6.7 percent, the unemployment is well above the 5.2 percent to
5.6 percent range Fed officials see as in keeping with full
employment. The central bank's favored inflation gauge is barely
more than half of its 2.0 percent target.
The Fed has held interest rates near zero since late 2008 and has
pumped more than $3 trillion into the economy with its bond
purchases to try to foster a stronger recovery.
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Of the Fed's 16 policymakers, only one believes it will be
appropriate to raise rates this year; 13 expect a first rate hike
next year, and two others see the first rate hike coming in 2016,
according to the new forecasts.
But once rate hikes start, Fed officials see slightly sharper
increases than they did in December, when they last issued
forecasts. They now see rates ending 2016 at 2.25 percent, a half
percentage point above their December projections.
The unease in markets "might be a sign that people think Yellen will
tighten sooner rather than later," said Wayne Kaufman, chief market
analyst at Rockwell Securities in New York.
The central bank proceeded with its well-telegraphed reductions to
its massive bond-buying stimulus, announcing it would cut its
monthly purchases of U.S. Treasuries and mortgage-backed securities
to $55 billion from $65 billion.
The decision to further scale back its stimulus keeps the Fed on
track for the measured wind down laid out by Yellen's predecessor,
Ben Bernanke. The Fed repeated that it plans to continue trimming
the purchases in "measured steps" as long as labor conditions
continue to improve and inflation shows signs of rising back toward
the Fed's 2.0 percent goal.
The Fed's assessment of the U.S. economy chalked up recent weakness
partly to adverse weather.
It had said since December 2012 that it would not consider raising
short-term rates until the jobless rate fell to at least 6.5
percent, as long as inflation looked set to remain contained.
But the unemployment rate has fallen faster than anticipated, and
officials dropped the guidance, saying they would look at a range of
economic indicators to judge the economy's readiness for higher
Minneapolis Fed President Narayana Kocherlakota dissented, saying
that getting rid of the numerical guidance could hurt the
credibility of the Fed's commitment to return inflation to 2.0
(Reporting by Ann Saphir and Krista Hughes; Additional reporting by
Jason Lange in Washington and Chuck Mikolajczak in New York; editing
by Tim Ahmann and Andrea Ricci)
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