So What Did Yellen Actually Say?

George Yacik - Contributor - Fed & Interest Rates

My educated interpretation of what Janet Yellen told the Senate Banking Committee on Tuesday boils down to this: The Fed is going to raise interest rates when it is going to raise rates and not one day earlier.

In other words, I don't have any idea, and it's likely she doesn't either. But it's probably not likely to happen in the immediate future, maybe not even this year.

Whether that's a mistake or not is a different matter (I think it is). But it was clear – or rather unclear – that the Fed has no intention of doing anything about raising short-term rates above near-zero anytime soon.

Analysts and pontificators, of course, did their best to put their own spin on what she said (kind of like what I'm doing now). In typical Fed Chair-speak, Yellen provided a bunch of "we might do this – but then again we might not" comments that could mean just about anything.

According to the Wall Street Journal's main Fed watcher Jon Hilsenrath, Yellen "laid the groundwork for interest-rate increases later this year."

With all due respect to Hilsenrath, who does a good job covering the Fed and trying to interpret what the Fed does and might do in the future, I didn't hear that. But then again, anyone listening to Yellen could have interpreted it any way they wanted to.

I think the market's reaction – both stocks and bonds – was correct: The Fed isn't going to do anything to rock the investment boat by raising rates anytime soon, maybe not even this year. So the price of both went up.

Yellen seemed to delight in telling the Senators one thing, then immediately hedging that with another comment.

First she said: "If economic conditions continue to improve, as the [Federal Open Market] Committee anticipates, the committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis. Before then, the committee will change its forward guidance."

By "change its forward guidance," Yellen apparently means that the Fed will get rid of its use of the word "patience" in its future monetary policy pronouncements, which would indicate that it's getting closer to raising rates. If you remember, the word "patience" replaced the previous words "considerable time" in Fed announcements. Now apparently it will get rid of that language entirely, or find another equally ambiguous synonym for "patience."

However, she hedged that by saying: "It is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings. Instead the modification should be understood as reflecting the committee's judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting."

If read correctly, "any meeting" could mean that the Fed will spring a rate rise on the market without warning, which I find difficult to believe that it would do, but who knows?

But her most (relatively) unequivocal comment about rate policy may have been: "Provided that labor market conditions continue to improve and further improvement is expected, the committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the committee is reasonably confident that inflation will move back over the medium term toward our 2% objective."

But since inflation – as measured by the Fed – is not even close to 2%, that could mean that a rise in rates is a long way off, and we can all relax for a while.

Where Yellen did depart from her carefully hedged comments and make, an unambiguous statement was her take on Sen. Rand Paul's "Audit the Fed" bill. "I want to be completely clear: I strongly oppose 'Audit the Fed'," she said. Such a bill would politicize monetary policy and subject the Fed to political pressure that could threaten its independence, she said. (See my earlier column about the Paul bill).

But her fancy footwork to avoid making any clear statements about monetary policy only demonstrates the need for such a law.

I've heard more times than I care to remember how the current Fed is a lot more "transparent" than the old Fed under Alan Greenspan. That may be true, but only the most delicate instrument can measure the difference.

Imagine, for a moment, a world in which you could make intelligent investment decisions knowing full well what Federal Reserve monetary policy is going to be. Better yet, imagine a world where you didn't have to take Fed policy into consideration, and make investment decisions solely on their merits.

Neither can I.

Visit back to read my next article!

George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

One thought on “So What Did Yellen Actually Say?

Comments are closed.