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Wednesday, March 19, 2014

Live Blog: Yellen and the Fed

Janet L. Yellen, the Fed chairwoman, briefed the press on Wednesday.Brendan Smialowski/Agence France-Presse â€" Getty Images Janet L. Yellen, the Fed chairwoman, briefed the press on Wednesday.

Janet Yellen met the media Wednesday for the first time as Federal Reserve chairwoman, after the conclusion of her first meeting leading the central bank’s policy committee. Here is an account of the events as they unfolded.

Auto-Refresh: ON Turn ON Refresh Now Feed Twitter 3:42 P.M. No-Drama Yellen

No muss. No fuss. No drama.

That summarizes Ms. Yellen’s first press conference at the helm of the Federal Reserve. She seemed, as she generally does in public settings, well practiced and confident.

Her main task was to explain why the Fed dropped its prior guidance that it would consider raising interest rates when the unemployment rate hit 6.5 percent. The unemployment rate is currently 6.7 percent and might fall below that threshold in a manner of weeks or months. But the current consensus within the Fed is that rate increases will not start until next year. The Fed is going to feel its way forward, Ms. Yellen said, looking at a broader range of statistics.

The stock markets dropped when the Fed made its policy announcement, though they have since regained some of their lost ground. Ms. Yellen repeatedly said that the Fed believed the economy was strengthening, but believed that it needed to continue to hold down short-term interest rates and to continue its campaign of asset purchases â€" even as it dials them back.

Ms. Yellen did make one controversial statement. In its policy release, the Federal Open Market Committee said that it was likely to keep interest rates near zero “for a considerable time after the asset purchase program ends.” How long is a “considerable” amount of time? a reporter asked Ms. Yellen. She suggested something like six months.

The Fed is expected to complete its taper of asset purchases in the fall. That would mean that it would start increasing interest rates in the spring of 2015 â€" early, in the minds of many market participants. But Ms. Yellen will have plenty of opportunity to walk that statement back, if she wishes, and in this press conference repeatedly said that the Fed would be looking at a range of data when deciding when to raise rates.

â€" Annie Lowrey

3:36 P.M. The Important Economic Indicators

Ms. Yellen spoke at length about the indicators she follows to get a better sense of the strength of the labor market.

First up is the labor force participation rate: the proportion of working-age Americans who either have a job or are looking for one. That rate has been falling, in part because the weak economy has discouraged many adults from even looking for a job and in part because the population is aging.

“There are differing views within the committee” on how much of the falling rate is due to weakness and how much is due to the changing composition of the work force. “It’s hard to know definitively,” she said, adding that it was “something to watch closely.”

She also said that the participation rate might “flatten out for a time as discouraged workers start moving back into the labor market.”

Next up is the quits rate, which Ms. Yellen describes as “in many ways, a sign of the health of the economy.” That is because workers tend not to quit their jobs unless they believe another good gig is out there. The rising quits rate is a sign that workers are feeling more confident and the labor market is normalizing.

Finally, Ms. Yellen said she liked to look at measures of wage increases, currently “running at very low levels.”

Ms. Yellen said that â€" given the country’s productivity growth, inflation rates and other economic measures â€" wages should be growing 3 or 4 percent a year. (That would be “normal,” she said.) But wage growth is scant. “Not only is it depressed,” she said, “it is certainly not flashing an increase that might signal some tightening.” In other words, there is nothing in worker compensation to suggest that the Fed should take its foot off the accelerator.

â€" Annie Lowrey

3:40 P.M. Ukraine and the Mysterious Drop in Bond Holdings

Peter Barnes of Fox Business asked whether the crisis in Ukraine was affecting markets and the economy â€" and whether a recent decline in international holdings of Treasury bonds at the New York Fed was caused by Russia’s pulling its money out.

Ms. Yellen declined to comment on the unprecedented $105 billion decline in bonds held in custodial accounts at the New York Fed. The identity of the holders of those accounts is a closely kept secret, and only aggregate data, released weekly, gave evidence of the decline in holdings.

As for a broader risk to the United States economy from Ukraine, Ms. Yellen said that she and her colleagues at the Fed were “not seeing broader financial repercussions” at present but that they were monitoring the situation closely.

3:27 P.M. ‘Premature’ Research on Normalizing Job Market

The Times’s Binyamin Appelbaum asked Ms. Yellen what credence she might put in an emerging range of evidence that suggested that while there remained millions of Americans who had been unemployed for long periods of time, the market was rapidly becoming more normal for everyone else. That is, might the job market have returned largely to health if one takes the long-term jobless out of the equation?

That could matter a great deal for the Fed, because it could mean that wage inflation might show up even when the overall unemployment rate remains elevated, because long-term unemployed with dim prospects are exaggerating the overall jobless rate.

While Ms. Yellen said that the committee would examine that evidence, she said it would be “tremendously premature” to use that theory as a justification for changing policy at this point.

“I don’t think our committee would endorse the judgment of the research you cited,” she said. Implicitly, to embrace that line of research would suggest the Fed was washing its hands of the long-term jobless program, which Ms. Yellen appeared unwilling to do based on preliminary evidence.

â€" Neil Irwin

3:26 P.M. ‘Shacking Up’ 3:24 P.M. The View From the Back 3:20 P.M. Yellen’s First Mistake? 3:11 P.M. Clarifying Dovishness 3:09 P.M. Blaming the Weather

Blame the sluggish economy on the weather â€" but only in part.

Ms. Yellen said that “weather has played an important role in weakening economic activity” in the first three months of the year. But she stressed that while it is an “important factor, it’s not the only factor.”

The Fed might have gotten overly optimistic about the strength of the recovery before the bad weather hit, she said. Its assessments are “partly down due to weather and partly down because we probably overdid the optimism in January,” she said.

But she repeated her belief that the economy was picking up â€" and the weather might be part of that rebound, too. Businesses might have put off hiring new employees because of the snowstorms. Some households might have decided to wait to test-drive new cars until the cold let up. Now that it is warming back up, we might see a snapback in economic activity, Ms. Yellen said.

â€" Annie Lowrey

3:06 P.M. Those Blue Dots

Binyamin Appelbaum of The New York Times and Jon Hilsenrath of The Wall Street Journal noted that in Fed leaders’ projections of future interest rates, there was some upward drift in expectations compared with December. For example, in December a minority of officials expected a federal funds rate over 1 percent at the end of 2015, but that has shifted to a majority.

So what gives?

Ms. Yellen’s answer in short: Don’t read too much into a few dots. Referring to the chart that plots the interest rate expectations of her and her colleagues as a series of blue dots, she encouraged Fed watchers to place greater weight on the overall thrust of the Fed’s communications. People shouldn’t take small moves in the number of officials predicting rates a year or two out as gospel, she argued.

“I would simply warn you that these dots are going to move up and down over time a little bit this way or that,” she said, noting the expectations edged toward lower rates in December before reversing slightly in March. “I don’t think it’s appropriate to read very much into it.”

And, she added, “the end of 2016 is a long way out. Monetary policy will be evolved to reflect evolving conditions in the economy.”

â€" Neil Irwin

3:01 P.M. Looking at a Broader Range of Information

The Associated Press asks Ms. Yellen to give more insight into the committee’s decision to drop its guidance that it might start considering raising interest rates when the unemployment rate fell to 6.5 percent.

First off, Ms. Yellen defended the so-called Evans Rule. (The proposal by Charles Evans of the Chicago Fed, adopted by the Fed in December 2012, that the Fed would keep interest rates at or near zero until unemployment falls below 6.5 percent or inflation rises above 2.5 percent or if long-run inflation expectations get out of hand.) The committee did not drop the guidance from its statement “because we think it hasn’t been effective,” she said, arguing it has had a “useful impact” in shaping the expectations of market participants.

But as the unemployment rate moved closer and closer to 6.5 percent â€" it is currently 6.7 percent â€" it became obvious that the committee would need to clarify its intentions, she said: “Markets want to know, the public wants to understand, beyond that threshold, how will we decide what to do?”

The committee wants to give the public more information, “even though it is qualitative information,” she said, updating its guidance as the economy changes.

She said that the unemployment rate was not capturing the pain in the labor market; hundreds of thousands of working-age adults have given up on looking for a job, for instance, and if they were to start looking the rate would rise.

“It’s appropriate to look at many more things,” she said. “That’s why the committee now states that we’ll look at a broad range of information.”

â€" Annie Lowrey

2:51 P.M. Not Close to Full Employment 2:48 P.M. Growth Potential 2:47 P.M. A Shout-Out for U-6

In her opening comments, Ms. Yellen made particular note of one measure of the labor market that is showing particular evidence of improvement. It’s U-6, a broad measure of unemployment that includes, in addition to those who fit the traditional definition of the jobless (people who do not have a job but want one, and have searched for a job in the last month), people who want a job but have given up looking out of frustration with dim prospects, and people who have part-time jobs but would like full-time work.

This measure of unemployment has declined from a peak of over 17 percent in 2010 to 12.6 percent in February.

Ms. Yellen was using that improvement, it appeared, to assure that the Fed was looking at broad evidence for job market improvement, not just the conventional unemployment definition, also known as U-3.

â€" Neil Irwin

2:41 P.M. Pre-Set Courses 2:33 P.M. Fed Officials Have No Idea What Rates Should Be in 2016

Making predictions is hard â€" especially about the future.

That is evident in Fed leaders’ forecasts for what the appropriate short-term interest rate will be in 2016. That may only be two years away, but Fed leaders’ assessment of the appropriate level of the federal funds rate, its main policy target, range from 0.75 percent to 4.25 percent, according to a chart published alongside new projections.

As Bloomberg View’s Matthew C. Klein tweets:

â€" Neil Irwin

2:31 P.M. Markets React 2:29 P.M. Look for Rate Increases Next Year

A whopping 13 of 16 Fed leaders believed it would be appropriate to raise interest rates in 2015, according to new projections of the path of interest rates in the years ahead.

Only one thought it would make sense to increase rates in 2014, and two thought that 2016 was most likely to be the day for tighter money. (The officials are not listed by name in the projections, though some make their own views plain in speeches and interviews.)

That suggests the officials believe the economic recovery is sufficiently robust, and well entrenched, that it doesn’t make sense to push the day of tighter money still further. At the December meeting, three officials thought that it would make most sense to tighten policy in 2016, though it is unclear whether the change resulted from one official’s change of view or turnover in the committee membership.

â€" Neil Irwin

2:24 P.M. Will the Fed Ever Raise Rates?

Here’s a snap response from Peter Schiff, the chief executive of Euro Pacific Capital:

The Fed will keep manufacturing excuses as to why rates can’t be raised. Whether it’s a cold winter or a hot summer, a geopolitical crisis, or an unexpected sell-off in stocks or real estate, the Fed will always find a convenient excuse to postpone tightening. That’s because it has built an economy completely dependent on zero percent interest rates. Even the smallest rate shock could be enough to push us into recession. The Fed knows that, and it is hoping to keep the ugly truth hidden.

But 13 of 16 Fed officials expect that the central bank will raise interest rates in 2015 â€" just next year.

â€" Annie Lowrey

2:22 P.M. Predicting Faster Fall in Unemployment

There were only modest changes in Fed leaders’ forecasts for how the economy will evolve in the years ahead in new projections released Wednesday. The biggest tweak: They now believe the unemployment rate will fall faster than they did at their December meeting.

Fed officials expect the unemployment rate to be in the 6.1 to 6.3 percent range at the end of 2014, down from 6.3 to 6.6 percent as of December. They reduced their forecasts for unemployment at the end of 2015 and 2016 by similar amounts.

The officials’ forecasts for gross domestic product growth and inflation were almost identical to their December forecasts, as were their predictions of the longer-term potential growth rate.

â€" Neil Irwin

2:20 P.M. Dovish Dissent From Kocherlakota

There was a dissenter in the ranks at the Fed meeting, with the Minneapolis Fed president, Narayana Kocherlakota, opposing the committee’s decision to change its language around what economic conditions might prompt a tightening of policy.

Mr. Kocherlakota has emerged as one of the F.O.M.C.’s strongest voices expressing concern about high unemployment and low inflation.

It concerns the fifth paragraph of the statement, which replaced numerical thresholds for inflation and unemployment that might spark an increase in interest rates with more vague, qualitative guidance. Mr. Kocherlakota believed this “weakens the credibility of the Committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.”

Mr. Kocherlakota agreed with the subsequent paragraph, however, in which the Fed said it will most likely keep interest rates low for some time, and his formal dissent offered no view of the main policy change to emerge from the meeting, of tapering bond purchases to $55 billion a month.

â€" Neil Irwin

2:19 P.M. Fed Says the Self-Sustaining Recovery Is Here

“There is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.”

That is the Fed announcing that a self-sustaining recovery is here. Unemployment remains elevated. The recovery is still slow by historical standards. There is slack, waste and pain across the economy. But the recovery, the Fed thinks, has finally gathered some steam â€" meaning that the Fed can start to ease off on its extraordinary campaign of support for borrowing, lending and economic activity in general. In January, in contrast, the Fed said it “continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.”

The Fed opens its statement by noting that economic activity “slowed during the winter months,” though it thinks that “adverse weather conditions” are partially at fault. Indicators remain “mixed” on the labor market, it said, and the unemployment rate remains “elevated.”

â€" Annie Lowrey

2:15 P.M. Numerical Thresholds Go Out the Window

Fed officials changed their communication about when they might raise interest rates to reflect what everybody already knew: that the old guidance that they would consider rate increases when the unemployment rate fell to 6.5 percent had become irrelevant.

That guidance, put in place in December 2012 and affirmed in every policy meeting since then, has proved misleading because the unemployment rate has fallen more rapidly than Fed officials had supposed, in large part because of people leaving the labor force at a rapid rate. The unemployment rate was 6.7 percent in February and could easily hit the 6.5 percent threshold in March or April. Yet the Fed is still most likely a long way from raising interest rates, wanting to see broader evidence of economic improvement first.

Reflecting that reality, the F.O.M.C. scrapped language with levels of unemployment and inflation that might start the debate around rate increases (6.5 percent and 2.5 percent, respectively), and added more vague, qualitative language. In deciding how long to keep rates near zero, “the Committee will assess progress â€" both realized and expected â€" toward its objectives of maximum employment and 2 percent inflation,” the statement said. “This assessment 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.”

â€" Neil Irwin

2:08 P.M. F.O.M.C. News Release

The Federal Open Market Committee released this statement:

Press Release
Release Date: March 19, 2014
For immediate release

Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Comittee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to ¼ percent target range for the federal funds rate, the Committee will assess progress â€" both realized and expected â€" toward its objectives of maximum employment and 2 percent inflation. This assessment 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. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

With the unemployment rate nearing 6½ percent, the Committee has updated its forward guidance. The change in the Committee’s guidance does not indicate any change in the Committee’s policy intentions as set forth in its recent statements.

Voting for the F.O.M.C. monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.

Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.

â€" Neil Irwin

1:33 P.M. Waiting for the Announcement

Fireworks â€" and policy changes â€" are likely to be few. The Federal Open Market Committee will most likely elect to continue slowing the pace of its injections of new money into the economy, with the pace of bond buying set to slow to $55 billion a month (from the current $65 billion and from $85 billion a month last year).

Officials have signaled they are likely to continue slowing the rate of bond purchases by $10 billion a month at each meeting this year, assuming the economy continues growing in line with their forecasts.

One open question is how the Yellen-led committee will adjust its communications to signal when the Fed will increase interest rates. Since late 2012, the Fed has signaled that it expects to consider rate increases when the unemployment rate falls below 6.5 percent, but joblessness has fallen faster than they expected and now stands at 6.7 percent. The central bank may reshape that language to get away from such precise indicators to guide their future policy.



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