Fed’s doubts in plain view at FOMC meeting, with Yellen repeatedly using the term ‘uncertain’
The U.S. Federal Reserve’s dwindling confidence in its own outlook and resulting confusion among investors are creating a policy problem that may require chief Janet Yellen to lay out her own views more forcefully.
The Fed chair’s next communications test comes on Tuesday and Wednesday during her semi-annual testimony to U.S. lawmakers, less than a week after the central bank kept interest rates unchanged near record lows and lowered its projections for hikes in 2017 and 2018.
A self-described consensus builder, Yellen sees her job as reflecting the whole committee’s views rather than setting an agenda for others to follow.
“I think that’s a very laudable intent, but sometimes that produces a lack of clarity,” said former Fed staffer and current partner at Cornerstone Macro LLC Roberto Perli. “Sometimes there is a consensus for one reason and then next time there is a consensus for a different reason so the story shifts and people get confused.”
In fact, Fed policymakers’ deepening uncertainty about their own projections has resulted in the central bank sending mixed messages – repeatedly ratcheting up rate hike expectations only to tone them down later.
Communication Breakdown
At Wednesday’s quarterly news conference Fed officials’ doubts were in plain view, with Yellen using the term “uncertain” or its variations 13 times, more than twice as often as in March. In December, when the Fed raised its rates by a quarter point for the first time in nearly a decade, that word only came up twice.
And on Friday, James Bullard, a Fed voter this year, said the economy may need only one rate hike for the next two and half years, and called on the Fed to discard its long-run forecasts altogether, or risk losing credibility with markets.
While most Fed officials still see two rate hikes this year, markets expect only one in December, if at all.
This gap is a source of discomfort for Yellen who places a premium on making sure markets can anticipate how new economic data will guide the Fed’s decisions on rates.
The Fed chief expressed surprise last week that markets had missed hints in the Fed’s April statement that a rate rise in June or July was possible and only got the message when the minutes of that meeting were published three weeks later.
The Fed changed tack again barely two weeks later after May’s weak jobs report, the latest in a string of factors that have repeatedly forced the Fed to pause in its efforts to nudge interest rates further away from zero.
