Janet Yellen’s first press conference and FOMC meeting did not go off as smoothly as she and others might have liked. In her first attempt to explain the direction of Federal Reserve policy, Chairwoman Yellen said that the current quantitative easing program would probably cease later this year around October 2014. Following the end of the taper, Chairwoman Yellen hinted that interest rates could begin rising around six months later around April 2015. This date was much earlier than most Fed watchers expected rates to possibly rise. So was this a mistake? Or was her comment an intentional redirection of Fed policy? Both Greenspan and Bernanke were remarked as having rough entrances to the job, and occasionally they used the Board of Governors to help them backtrack on comments.
These comments were in relation to her explanation of why the Fed had dropped their earlier use of forward guidance. Unfortunately many former Fed officials and other economists are confused about why the Fed has not been more specific about what is guiding their thinking into 2015-2016. The ‘conventional’ thinking that there is a single inflation rate that should be hit has been challenged by those supporting overshooting as described in The Economist (and a second related article) (even though overshooting is usually reserved for other uses). Now, the Fed as led by Yellen might actually be acting in what appears to be a conventional way by claiming to target a specific inflation rate while acting some other way. What is it that we think the Fed is actually doing?
Has the Fed suddenly become more hawkish on inflation? What would the Fed have to do about their balance sheet in order to tighten policy? Some of the increase in QE/Base has clearly gone to support emerging markets. What effects do you expect on foreign markets, and therefore back on the US?
Questions you might answer:
- Many of the questions you can look at were posed above in the text. Look there for suggestions, or bring your own analysis of Yellen’s recent comments during her press conference or the most recent FOMC meeting announcements.