|
 That gamble was to specifically reference the next policy meeting as
a date of a possible lift-off, and it had the desired effect:
investors quickly rolled back bets that rates would stay near zero
until next year.
But interviews with current and former Fed officials, and with those
close to policymakers, show the decision to use what is called
calendar guidance in central bank parlance and what some described
as a "hammer" did not come easy. Some officials felt that even
mentioning a date in the context of a potential policy change would
be taken not as a contingent expectation but as a promise that would
be painful to break.
The last time the Fed flagged its next meeting for possible action
was in 1999, as JPMorgan economist Michael Feroli pointed out. It
resorted to calendar-based commitments of ultra-easy policy during
the global financial crisis and recession, but ended that practice
three years ago.
Yet Fed Chair Janet Yellen and her deputies got so frustrated that
investors virtually ignored their message that a rate rise before
the year end was probable that they decided last month it was a risk
worth taking, the interviews show.
As a result, futures markets are now giving slightly
better-than-even odds that rates will rise from near zero next
month, compared with mid-October when the odds were less than 30
percent.
(Graphic: market rate expectations: http://reut.rs/20v61Ut)
Fed officials and people familiar with their thinking say the
central bank is comfortable with such market expectations ahead of
the Dec. 15-16 policy meeting, the last of the year.
Last week's communication gambit, one of Yellen's biggest in nearly
two years as Fed chief, suggests the central bank still considers a
modest rate rise this year as its base scenario.
TIMELY FASHION
It may also suggests that Fed policymakers are already lining up
behind Yellen despite public comments that can sound at odds with
her message. The Oct. 28 statement was passed by a 9-1 vote, with
two Fed governors who had earlier publicly embraced a delay in rate
hikes joining the majority.
"If a majority still believed that such a move would be premature,
then they could have just left the wording unchanged from their
previous statement," said Andrew Levin, former advisor to Yellen and
Dartmouth College economist.
Yellen herself reiterated on Wednesday that a "lift-off" this year
remained her preferred option, when she told the House Financial
Services Committee that "moving in a timely fashion" was prudent so
long as the economy continued to perform the way it had so far.
And while the slackening growth in monthly payrolls convinced some
investors that the Fed should wait, several policymakers have been
pointing out that slackening jobs was in fact a sign that the labor
market recovery was nearly over.
Investors and economists who advocate more patience warn of a risks
of market turbulence if the Fed lifts its rates while its peers in
Europe, Japan, China and elsewhere are in an easing mode. With rates
having been near zero since late 2008, even a small move is expected
to ripple through global markets, boosting the dollar and drawing
funds out of emerging markets.
In fact, a brief but sharp market sell-off in August triggered by a
slowdown in China and fears of a global economic chill persuaded the
Fed to leave rates steady in September. The decision, even though
described as a "close call" by some policymakers, led many investors
to pare down their bets on a rate rise this year.
[to top of second column] |
Since then, Yellen, her deputy Stanley Fischer and New York Fed
President William Dudley had set out to reinforce the message that a
gradual rise in rates would likely begin before year end, in part
because of an expected recovery in inflation thanks to stabilizing
oil prices.
But Yellen's Sept. 24 speech, seen as crucial for conveying that
message, got drowned in the attention her health drew after she
struggled to finish the speech and received medical assistance.
BLURRED MESSAGE
Later a set of weak U.S. data and comments from Lael Brainard and
Daniel Tarullo, two influential Fed governors close to Yellen,
urging patience on rates, further blurred the picture and
intensified criticism of the Fed's communication.
On Oct. 16, Dudley got an earful from Wall Street bankers and
economists on a New York Fed advisory panel criticizing the Fed for
its muddled message, according to three people who attended the
meeting.
The interviews with Fed officials and those close to the central
bank suggest that it was around this time that the plan to hint at
December in the next policy statement started taking shape.
Yellen, her deputies, and a few top staffers typically write the
first draft of the statement two weeks before the policy meeting.
A so-called teal book effectively formalizes the language a week
later with feedback from other Fed presidents and governors.
Some Fed officials were uncomfortable with the "innovation," said a
source with knowledge of how the decision was made, but they agreed
to back it because "there was a sense that the market wasn't
listening."
The December reference is not a commitment to a rate rise next month
since the decision will still depend on whether economic
developments will confirm or derail the Fed's medium-term
expectations for jobs, growth and prices, the sources said.
But the language allows both hawks and doves to endorse it, and buys
Yellen time to rally them around her plans while honing the Fed's
message.
"It's a tactical decision for Janet Yellen," said Vincent Reinhart,
an economist with the American Enterprise Institute and former chief
of the Fed's monetary affairs division.
"You will buy off some of your more hawkish colleagues by reassuring
them that you are willing to tighten, and you will buy off the
dovish colleagues by convincing them that you can remain
accommodative longer by starting sooner."
(Reporting by Jonathan Spicer, Howard Schneider and Ann Saphir;
Editing by Tomasz Janowski)
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