Recently confirmed Federal Reserve Chair Janet Yellen held her first press conference and Federal Open Market Committee meeting on Wednesday.
In general the meeting went over well, except for some confusion about the fate of the Fed’s low short-term interest rates which unfortunately spiraled into even more trouble for Yellen.
Under the previous Chair, the board agreed to maintain the low interest rates until the unemployment rate had fallen below 6.5 percent. Since the unemployment rate stood at 6.7 percent as of February this year, revisiting the issue was necessary. The market was wondering what would happen after the certain, impending 0.2 percent drop.
In the end, the committee decided to drop the definitive 6.5 percent threshold, but maintain its “forward guidance” towards lowering unemployment and achieving 2 percent inflation.
Many did, indeed, interpret this as Yellen allowing for continued low rates even after, hopefully, unemployment falls to below 6.5 percent. Yellen is well-known for being passionately pro-employment, so it is unlikely she would do anything to hinder the improving employment rate.
Some, however, interpreted her statements in the opposite direction. With no certain time frame, who really knew when the rates would spike again? Matters were not helped when Yellen estimated the time between the last asset purchases and the end of the low interest rate to be around “six months”, sooner than many expected. A minor panic ensued on Wall Street.
Fortunately, the Federal Reserve quickly released a clarifying statement. In the press release, FOMC outlines the factors they will be looking at in addition to unemployment before deciding to raise rates. These include “labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments”. In essence, it gives the market even more time to partake of the low rates.
If more clearly stated in the beginning, this may have quelled many fears. Instead it caused a small uproar. Still, the matter was clarified in only a couple days. Yellen’s fate as a Chair is no where near decided yet. But, many critics posit, Yellen may choose to be more vague with her timelines in the future.
Image via Wikimedia Commons
