Yellen speaks for hour, market only hears three words

[thenews]

Federal Reserve Chairwoman Janet Yellen spoke for an hour at her press conference Wednesday, but the market only heard three words: “around six months.”

She was asked how long the Fed would wait after the tapering ends before it begins to raise interest rates.

Her answer: “So the language that we used in the statement is ‘considerable period.’ So I, you know, this is the kind of term it’s hard to define. But, you know, probably means something on the order of around six months, that type of thing.”

She added lots of qualifiers to that, including the assessment of the labor market and the inflation outlook, but the markets only heard “around six months.” Markets sold off.

The taper of the Fed’s bond purchases is on course to end in October or November. Six months after that would be April or May. So Yellen said the first rate hike could come in April or May, depending on how the economy is doing.

Before this Fed meeting, the market had been expecting the first rate hike to come toward the end of 2015, perhaps in October or December. The updated forecasts provided by the Fed’s “dot plot” would point to a first rate hike in September or October of 2015, just a little faster than the market had been expecting.

Now we’ve heard from the Fed chair that the first hike could — emphasize could — come two or three meetings before that.

Did Yellen mean to be that specific? No, the Fed has always loosely defined “considerable period” as about half a year. It’s supposed to be a little vague. She probably didn’t intend to give any hints about timing beyond what the “dot plot” said. No Fed chair is going to confidently tell markets that it’s going to raise rates in 14 months.

But now that she’s leading the Fed, the markets will react to what she said, not what she means.

Now it’s up to Yellen and her colleagues to walk this back, if they don’t like what the market heard.

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