Quotes of the Day

Global equity markets ended lower on Wednesday while yields on U.S. Treasuries jumped after comments by U.S. Federal Reserve Chair Janet Yellen raised the possibility that interest rates could rise soon than has been expected.

Yellen, speaking at her first press conference as the Fed chief after the close of the U.S. central bank’s two-day policy meeting, said the Fed could start to raise interest rates around six months after its current asset purchase program ends…

“She certainly moved it up a little bit and I don’t think the market was expecting that at all because she is widely viewed as being more on the dovish side of the aisle than she is on the hawkish side,” said Peter Kenny, chief executive officer of Clearpool Group in New York.

“That is not a particularly hawkish comment, but the fact of the matter is it was not expected.”

Fears that the Fed’s policy-setting Federal Open Market Committee might move away from its near-zero rate policy sooner than some traders had previously thought unleashed a wave of selling in the bond market. Short-dated and intermediate Treasuries suffered the biggest losses since they are seen as the most vulnerable to a swifter change in Fed policy.


“I think the market being reminded that the Fed will eventually raise rates is getting traders’ attention,” John Canally, an economic strategist at LPL Financial Corp. said in a phone interview from Boston. His firm oversees about $438.4 billion. “We’ll probably get a couple days of back and forth in the markets, but this is all good change.”

Bonds and U.S. equities retreated as the Fed said officials predicted their target interest rate would be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast, as they upgraded projections for gains in the labor market. The central bank also reduced the monthly pace of bond purchases by $10 billion, to $55 billion.

Benchmark indexes extended losses as Yellen said the quantitative easing program would end this fall if the Fed continues to taper purchases in measured steps. She said she sees a “considerable time” between the end of the stimulus and the first rate increase, meaning “six months or that type of thing.”


Janet Yellen isn’t one to declare victory and go home. Today, the Federal Reserve chair announced that the central bank will keep working to stimulate the economy even though it has already almost achieved the goal it set for itself in 2012, to bring the unemployment rate down to 6.5 percent.

We know we’re not close to full employment, not close to an employment level consistent with our mandate,” Yellen told reporters. She added that “unless inflation were a significant concern, we wouldn’t dream of raising the federal funds rate target.” The target for the federal funds rate—the short-term interest rate that the Fed directly controls—has been a historically low 0 to 0.25 percent since December 2008.

At her first press conference since becoming chair of the Fed in February, Yellen explained that Fed rate-setters will abandon the 6.5 percent target and instead look at a broader range of data to decide when and how much to curtail stimulus.



Janet Yellen was boring. And that’s exactly what she wanted to be.

The newly installed Federal Reserve chair, in her first big policy meeting and news conference, gently nudged the central bank away from its extraordinary easy-money policies and toward a more normal footing in a way that only mildly upset markets, which sank a bit on the slightly more hawkish tone.

It was surprising but I don’t place much weight on it,” Pantheon Macroeconomics’ Ian Shepherdson said of the “six-month” comment. “I guess the pressure of the occasion got to her. Otherwise her performance was solid, she did her best to make the dove case, having been dealt a poor hand by her colleagues, nudging up their rate forecasts.”

Stocks quickly sold off following the “six-month” comment but recovered later as investors got more comfortable that the remark was hardly a firm policy commitment and was not really out of line with what the FOMC said in its consensus projections. It also happens to be exactly the consensus among Wall Street analysts for when the Fed will start bumping up rates.


The Fed, under Bernanke, promised that when the unemployment rate hit 6.5%, the central bank would raise interest rates. This was called quantitative guidance, and it fed Wall Street’s fetish for largely made-up numbers. The 6.5% benchmark was a big hit with traders. It meant they didn’t have to think very hard: when unemployment hit 6.5%, Wall Street could start girding itself for a rise in interest rates.

Then Yellen shut down the betting parlor. In a statement, the Fed said it “will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. This is what is now called ‘qualitative guidance’”.

Translation: the Fed is looking at when the economy improves, and the economy comprises a giant number of measures and statistics. If Wall Street wants Cliffs Notes, it will have to look elsewhere.

That was Janet Yellen’s declaration of independence. And that matters even – especially! – if you don’t work on Wall Street.


There are complicated structural reasons why we are in the longest and weakest recovery of the post WW II period. When I interviewed Yellen earlier this year, she made it quite clear that she knew that the Fed’s firepower was running low—although she still believed that clear and thoughtful forward guidance could help calm markets. (Today’s reaction shows that will be a tricky act to pull off.) Still, by proving hawks that had predicted a Yellen-led Fed would remain too dovish for too long wrong, she’s showing a careful regard for the market impact of long-term loose monetary policy. She may be concerned about the “human impact” of unemployment, but she clearly doesn’t want markets to crash, either.

All in all, I’m rather surprised that the markets took the rate hike news as so hawkish and definitive, given that she stressed again and again that the Fed would be watching a broad range of economic indicators to make sure that they were getting the timing of internet rate tightening right…

To me, that’s reassuring. It’s interesting that to markets it was worrisome. That shows just how dependent investors have become on Fed news going in one direction only and how removed some asset prices have become from fundamentals. When I close my eyes, breathe deeply and visualize the future, I see…more volatility.


PROGRAMMING NOTE: Allahpundit is still standing in line to volunteer for the Crimean Army, but should be returning as soon as that no longer exists.