and clear, Yellen says rate path will be well signaled
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[December 17, 2015]
By Ann Saphir
SAN FRANCISCO (Reuters) - The unanimous
backing Federal Reserve Chair Janet Yellen got for the Fed's first rate
hike since the financial crisis let her deliver a clear message: Don't
expect further rate hikes for a while, and when we are ready, we'll tell
Yellen's confident and measured performance - she even managed a
joke about the Fed's forecasting record - came as she ended the
"extraordinary" measures that revived the U.S. economy from the
worst recession since the 1930s.
Clear communication has not been a strong suit at the U.S. central
bank in recent months, with top Fed officials talking at cross
purposes and sending mixed signals about when the benchmark interest
rate should rise. But when it mattered the 69-year old economist
guided markets to a soft landing and convinced skeptical rate
setters to back the consensus.
Indeed, before the Fed's last meeting, an overwhelming majority of
Wall Street firms told the Fed that its communications were
ineffective or nearly so, according to the New York Fed's most
Stocks even managed a rally on the Fed decision as Yellen corralled
doubters like Fed governors Lael Brainard and Daniel Tarullo, as
well as the dovish chief of the Chicago Fed, Charles Evans, to sign
on to the decision to raise short-term interest rates.
Even projections for future rate hikes have coalesced, with nearly
all Fed officials agreeing within a quarter of a percentage point on
where the benchmark rate should be by the end of next year. In
September views were much more widely dispersed.
"Definitely a communications coup," said Scott Anderson, chief
economist for Bank of the West in San Francisco.
Market responses were relatively muted, with futures on short-term
interest rates dropping just enough to suggest traders now believe
the next rate hike will occur in April, rather than in June as had
THE IMPORTANCE OF "GRADUAL"
During an hour-long news conference following the Fed's two-day
policy meeting, Yellen appeared relaxed, smiling when asked if she
worried the Fed had raised rates too early. She left no doubt that
the most important new word in the Fed's post-meeting statement was
And though she did not define exactly what gradual rate hikes meant,
she did point to the "nearly 1.5 percent" median Fed forecast for
the short-term rate next year.
And, she said, it does not mean "evenly timed, equally sized
interest rate changes," but should be slow enough so the Fed can
gauge the effect on financial conditions and spending.
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She again said that markets and officials would be well prepared for
the next move.
"We've made a commitment to emerging market policymakers that we
would do our best to communicate as clearly as we could about our
policy intentions to avoid spillovers that might result from abrupt
or unanticipated policy moves," she said.
Yellen and the Fed came under fire earlier this year for sending
mixed messages to markets, culminating in September when Yellen
caught much of Wall Street by surprise by holding rates steady and
warning on global growth prospects.
Traders then pushed expectations for a first rate hike well into
2016, forcing the Fed in October to tip its hand that a rate hike
could take place in December.
Even with the well-telegraphed liftoff from zero rates behind her,
Yellen faces a communications minefield ahead, in part because the
unanimity around the historic rate rise may not hold once
normalization gets further underway, but also because the economic
data may not come in as expected.
"The rhetoric from the Fed statement remains accommodative, but its
data dependant guidance will continue to bring uncertainty and
volatility in 2016," said Alfonso Esparza, senior currency
strategist at Oanda in Toronto.
(Reporting by Ann Saphir; Additional reporting by Gertrude Chavez;
Editing by Leslie Adler)
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