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VOL. 38 | NO. 11 | Friday, March 14, 2014

Yellen's tightrope walk in first Q&A as Fed chair

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WASHINGTON (AP) — At her first news conference as Federal Reserve chair, Janet Yellen had a message for the financial world: The U.S. economy may need several more years to fully heal from the Great Recession.

With investors around the world hanging on her words, she conveyed the calm voice of authority she's been known for in her decades as a policymaker, regulator and professor.

Yet, as with her predecessor, Ben Bernanke, in his news conferences, Yellen's performance wasn't quite stumble-free. Speaking of when the Fed might raise short-term interest rates from their record lows, she was surprisingly specific. Her remark appeared to muddy her overarching message that rates are bound by no single economic indicator or time frame.

The slip-up occurred as Yellen was discussing the Fed's benchmark short-term rate, which has remained at a record low near zero since 2008.

The short-term rate has remained a critical source of economic support as the Fed has recently begun paring its monthly purchases of Treasury and mortgage bonds. The bond purchases have been meant to stimulate the economy by keeping long-term loan rates down.

The monthly purchases, down to $55 billion from a peak of $85 billion, are on track to stop by year's end. The Fed's short-term rate could remain near zero for a "considerable time" after the bond buying ends, according to the statement the central bank issued when its meeting ended Wednesday.

At her news conference, Yellen was asked to define a "considerable time." Her reply: "It probably means something on the order of around six months or that type of thing."

Stocks immediately sank on her mention of "six months" — even though Yellen quickly stressed that a six-month time frame did not represent any commitment.

"We need to see where the labor market is, how close are we to our full-employment goal," she cautioned. "That will be a complicated assessment, not just based on a single statistic."

Still, her explicit mention of six months suggested that a rate hike could occur before the summer of 2015, shortly before some analysts had expected. A short-term rate increase would elevate borrowing costs and could hurt stock prices. The Dow Jones industrial average ended the day down more than 100 points.

"She got caught off guard," said Douglas Roberts, chief investment strategist at ChannelCapitalMarkets, even though Yellen explained that she was "pretty decisively on the dovish side" in Roberts' words — meaning she favors keeping rates low to boost the economy more than she worries about igniting inflation.

For his part, Bernanke committed a gaffe of his own last summer.

At his June news conference, Bernanke said he'd been "deputized" by his Fed colleagues to describe a possible path toward slowing the monthly bond purchases. Bernanke said the slowdown would likely start before year's end and be completed by mid-2014.

Investors responded in panic to the prospect that the Fed would soon reduce its support for the economy. The Dow Jones industrial average sank 560 points in two days.

On Wednesday, apart from her remark about six months, Yellen glided smoothly through her first Fed news conference. Sitting behind a desk, Yellen, 73, explained that the 4½-year-old economic recovery still needs a boost from unusually low rates.

In its statement Wednesday, the Fed dropped its previous mention of a 6.5 percent unemployment rate for considering a rate hike. The unemployment rate is now 6.7 percent.

Fed officials "never felt that the unemployment rate is a sufficient statistic," Yellen explained.

Many unemployed people have abandoned their job hunts, so they're no longer counted as unemployed, and their departures have caused the unemployment rate to drop.

Others have found part-time instead of full-time jobs. Pay growth has been depressed. And inflation remains below the Fed's target of 2 percent, a sign of weak consumer demand.

Carl Tannenbaum, a former official at the Federal Reserve Bank of Chicago, said he appreciated that Yellen was "a bit more expansive" than Bernanke typically was in helping explain how the Fed was viewing the economy.

Tannenbaum, now chief economist at Northern Trust in Chicago, saw her six-month remark as something of a blip. He expects other Fed officials to try to walk back Yellen's remark in their speeches and public remarks in coming weeks.

The Fed's decision to drop a reference to 6.5 percent unemployment was supposed to mark a departure from tying a rate hike to a precise number or date.

Because the economic gains needed to raise rates have been slow to emerge, the Fed has had to frequently revise its plans for a potential increase. What was once mid-2013 turned into late 2014. Then the threshold was changed toward the end of 2012 to the unemployment rate dipping below 6.5 percent.

The Fed's decision to drop the 6.5 percent unemployment threshold "represents the difficulty in finding the perfect economic indicator for explaining something as complex as the state of the labor market recovery and other considerations such as financial stability," James Marple, senior economist at TD Economics, wrote in a research note.

Until the time-frame issue suddenly resurfaced, Yellen had been making a case for why the Fed still needed to bolster the economy.

"She sounded a lot more dovish than hawkish," said John Canally, an economist at LPL Financial. "She spent a lot of time talking about how far away we are from full employment."

The Fed cut its benchmark short-term rate more than five years ago to a record low near zero, where it's remained since.

The Fed also updated its economic forecasts Wednesday. Fed officials expect the U.S. economy to grow at a steady if modest pace in 2014 despite weather-related setbacks this winter. The Fed is forecasting growth of 2.8 percent to 3 percent this year, a bit lower than its December projection of between 2.8 percent and 3.2 percent.

The Fed's statement was approved on an 8-1 vote. Narayana Kocherlakota, president of the Fed's regional bank in Minneapolis, cast the dissenting vote. Kocherlakota felt the changes the Fed made to its guidance on future short-term rate increases had weakened its credibility in raising inflation to the Fed's target of 2 percent.

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