Yellen speaks; clarity weak; stocks squeak

McClatchy Washington BureauMarch 19, 2014 

— The Federal Reserve continued tapering its controversial bond purchases on Wednesday, trimming back another $10 billion a month in April and signaling clearly that it expects to promote low borrowing rates well beyond the end of its stimulus efforts.

In announcing the move, new Fed Chairwoman Janet Yellen said there is “sufficient underlying strength to support ongoing improvement in the labor market.”

With the economic recovery appearing to shift into higher gear, the Fed began cutting back its purchases of government and mortgage bonds, reducing last year’s pace of $85 billion a month in total purchases by $10 billion in January and another $10 billion in February. Wednesday’s announcement, taking effect in April, slows the Fed’s purchases to a pace of $55 billion a month.

Financial markets watched Yellen’s first news conference closely for signs of daylight between her policies and those of her predecessor, Ben Bernanke. They didn’t like what they heard, or thought they heard, on the timing of future Fed actions.

The Dow Jones industrial average was down 190 points during much of Yellen’s first news conference, leveling off a bit at the close. The Dow Jones lost 114.02 points on the day to close at 16,222.17. The S&P 500 ended off 11.48 points to 1860.17, and the NASDAQ finished 25.71 points lower to 4307.60.

What ignited the sell-off was Yellen’s potential time frame for raising rates after the end of the bond purchases, expected in December. She suggested “something on the order of six months,” but she qualified repeatedly that inflation remains stubbornly below target and would be a factor to weigh.

“Our view is that this could have been a rookie gaffe on Yellen’s part. This was, after all, her first press conference,” said Paul Edelstein, director of financial economics for forecaster IHS Global Insight. “The balance of what we learned today was dovish, not hawkish. We, therefore, maintain our expectation for the first rate hike in late 2015.”

Like first light breaking a distant horizon, the Fed’s revised economic forecast sees the benchmark federal funds rate at 1 percent at the end of 2015 and 2 percent in 2016. That, too, helped focus markets on the coming end of the sugar high received from the bond purchases, which have boosted stock prices.

The further slowdown in bond purchases was expected, but it was not unanimous and featured a dissent for reasons that might provoke controversy as the Fed tries to return monetary policy to normalcy.

The dissent came from Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, who opposed new language that he felt “weakens the credibility” of the Fed’s commitment to return inflation to a target between 1 percent and 2 percent.

The language in question involves Yellen’s desire to provide more guidance about what the Fed might do after it has stopped buying government and mortgage bonds late this year or early next year. The Fed statement said benchmark lending rates are expected to stay near zero, where they’ve been since December 2008, “for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below” the Fed’s 2 percent longer-run goal.

That promise, held Kocherlakota, “fosters policy uncertainty that hinders the economy.”

To counter those concerns, Yellen took great pains during her opening statement and throughout the press conference to amplify scenarios under which the Fed could begin to raise rates, an action that is usually done to put the brakes on an economy growing too hot.

The new Fed chief also defended the decision to change guidance and remove an unemployment rate of 6.5 percent as a sign that the Fed will consider raising rates. That number originally had been viewed as an important signpost, but Yellen on Wednesday said it is effectively inconsequential because “we are not close to full employment.”

Measures of underemployment and stress in the labor market remain elevated, she added.

Big developing economies such as Brazil have complained that the tapering has been disruptive because investors are fleeing those nations for safer, albeit less lucrative bets in the United States. Critics of the Fed effort complain it is akin to printing money and could eventually spark inflation, although there is little sign of looming inflation anywhere right now.

The Fed also revised its December outlook, with the central tendency of projections from Fed governors and presidents slightly more optimistic on hiring and slightly more pessimistic on growth. The projections now see growth in range of 2.8 percent to 3 percent this year instead of a range as fast as 3.2 percent as envisioned in December.

Similarly, the projections for the unemployment rate in 2014 are now between 6.1 percent and 6.3 percent, instead of the range of 6.3 percent to 6.6 percent envisioned in December.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall.

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