Yellen makes 'uncertainty' new mantra as
market doubts Fed view
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[June 21, 2016]
By Lindsay Dunsmuir and Ann Saphir
WASHINGTON/SAN FRANCISCO (Reuters) - The
U.S. Federal Reserve's dwindling confidence in its own outlook and
resulting confusion among investors are creating a policy problem that
may require chief Janet Yellen to lay out her own views more forcefully.
The Fed chair's next communications test comes on Tuesday and
Wednesday during her semi-annual testimony to U.S. lawmakers, less
than a week after the central bank kept interest rates unchanged
near record lows and lowered its projections for hikes in 2017 and
A self-described consensus builder, Yellen sees her job as
reflecting the whole committee's views rather than setting an agenda
for others to follow.
"I think that's a very laudable intent, but sometimes that produces
a lack of clarity," said former Fed staffer and current partner at
Cornerstone Macro LLC Roberto Perli. "Sometimes there is a consensus
for one reason and then next time there is a consensus for a
different reason so the story shifts and people get confused."
In fact, Fed policymakers' deepening uncertainty about their own
projections has resulted in the central bank sending mixed messages
- repeatedly ratcheting up rate hike expectations only to tone them
At Wednesday's quarterly news conference Fed officials' doubts were
in plain view, with Yellen using the term "uncertain" or its
variations 13 times, more than twice as often as in March. In
December, when the Fed raised its rates by a quarter point for the
first time in nearly a decade, that word only came up twice.
And on Friday, James Bullard, a Fed voter this year, said the
economy may need only one rate hike for the next two and half years,
and called on the Fed to discard its long-run forecasts altogether,
or risk losing credibility with markets.
While most Fed officials still see two rate hikes this year, markets
expect only one in December, if at all. (Graphic:
This gap is a source of discomfort for Yellen who places a premium
on making sure markets can anticipate how new economic data will
guide the Fed's decisions on rates.
The Fed chief expressed surprise last week that markets had missed
hints in the Fed's April statement that a rate rise in June or July
was possible and only got the message when the minutes of that
meeting were published three weeks later.
The Fed changed tack again barely two weeks later after May's weak
jobs report, the latest in a string of factors that have repeatedly
forced the Fed to pause in its efforts to nudge interest rates
further away from zero.
"The risk of data dependency is that it becomes data jumpiness,"
said JPMorgan economist Michael Feroli.
TAKING THE LEAD
Part of the reason for the Fed's latest change in tune is its
assessment of how high rates can rise before they start restraining
economic growth. Last week, policymakers cut their projections for the
third time in the last four quarterly projections.
[to top of second column]
Federal Reserve Chair Janet Yellen speaks at the Radcliffe Institute
for Advanced Studies at Harvard University in Cambridge,
Massachusetts, U.S. May 27, 2016. REUTERS/Brian Snyder
The level, now at 3 percent, is well below the 4.25 percent rate
policymakers expected when they first began publishing long-term
forecasts for the Fed's policy rate in 2012. With a lower ceiling
for rates, policymakers now expect a shallower path upward.
Policymakers are also lowering their forecasts for those long-run
rates more often. They cut their projections by 0.75 percentage
points over the past year compared to a half a point cut over the
prior three years. (Graphic: http://tmsnrt.rs/28JfmBR)
Despite outliers, such as Bullard, whose views are at odds with the
majority, the Fed appears to be coalescing around its latest
The central tendency ranges, which toss out the three highest and
three lowest forecasts, show policymakers are projecting a narrower
range of policy outcomes and economic indicators than they did in
March, suggesting a majority is actually less divided over the right
path for policy than just three months ago.
The problem is investors and economists are still not clear what
primarily shapes those views. The Fed's 17 policymakers have
stressed the importance of progress in employment and inflation and
yet have repeatedly hit a pause button even as both indicators
continue to improve.
That is where Yellen, who is particularly concerned about labor
market health, could create more clarity on what is now guiding the
Fed by being more forthright with her personal views, Fed watchers
"It's weird for her to take part in that discussion and push things
her way and yet then talk to the press about where the group is but
not where she is," said Joe Gagnon, also a former Fed staffer and
now senior fellow at the Peterson Institute for International
Economics. "She should probably be a bit more honest."
(Reporting by Lindsay Dunsmuir in Washington and Ann Saphir in San
Francisco; Additional reporting by Jason Lange; Editing by David
Chance and Tomasz Janowski)
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