The Federal Reserve held interest rates near zero on Thursday, raising questions over how it will ever manage to lift them off the floor and how effectively it will communicate plans to do so.
Only just over half economists polled have predicted such an outcome, a rare occurrence, and a sign of just how hard it has become to read the Fed these days.
Prior to the rate decision, Fed Chair Janet Yellen had not spoken in almost two months. Two of her closest allies had spoken late last month but delivered seemingly contradictory messages just days apart.
After the decision, Yellen said while it was an “unfortunate state of affairs” that every comment by a Fed official is parsed for hints about the Fed’s next move, “uncertainty in financial markets” is natural when a policy shift is near, as it is today.
Policymakers do not, she said, try to make up their minds on a daily basis based on the economic release of the moment, but use their regular meetings to take stock of the accumulated information and make a decision from there.
“We do our darndest to pull together the best analysis we can,” Yellen told a news conference.
The issue appears to be how Yellen manages the rate setting body. Like her predecessor Ben Bernanke she listens to others before speaking at the open markets committee and she appears to value forming consensus, shown by the fact that there was just one dissent in Thursday’s vote.
The language used by the Fed is aimed at giving it a high degree of flexibility when it comes to rate decisions.
That may now be a weakness when it comes to communicating where the Fed is in situations in which it might need to pivot in response to developments such as the recent market turmoil in China and beyond, possibly leading to continued volatility in financial markets.
For months the Fed has said it will only raise rates once it is “reasonably confident” that inflation will rise back to its 2-percent target. At the same time, it has said it “expects” it will rise toward that rate, despite continued misses, and without spelling out what more information would be needed.
Questions remain over how Fed will manage to lift rates, communicate plans
September 18, 2015 by Leave a Comment