Welcome Madame Chair, here’s a market selloff for you.
Fed Chair Janet Yellen made some news that she didn’t expect yesterday. She perhaps thought she was offering some clarity when she answered the question from Reuters’ Ann Saphir as to when the Fed might start raising interest rates. That’s not how it worked, although at least in this case she didn’t mouth off to Maria Bartiromo the way Ben Bernanke did eight years ago.
What we didn’t see in her answer on the distance between the end of QE3 and the first rate hikes of “six months” (or something like that), is whether we will start to see any kind of reaction from the primary dealers surveyed by Reuters yesterday.
Most still see the Fed not raising rates until late in 2015 although there were a couple of notable changes. Barclays moved up its expectations for the rate increases to the second quarter of 2015. There were still, however, four dealers that do not see rate hikes coming until 2016. This may, on some level, put the Fed behind the curve as interest-rates adjust, though it was notable to see several Fed members in the Fed’s projections believe rates should be at 1 percent by the end of 2015. (It wasn’t much of an adjustment, but somehow, the way it looked on the dot matrix chart the cool kids were talking about was enough to get the bond market in a lather. The stock market, of course, didn’t react until someone (Yellen) told it what to do.)
What is undetermined now, however, is what the Federal Reserve will be looking at when it decides whether to raise rates or not. The market has gotten awfully used to the idea of a threshold on the unemployment rate that made things easy. Without that, it reverts to looking at a number of indicators, although the Fed chair yesterday did say that she thought the unemployment rate was one of the best indicators.
It is perhaps to the markets’ credit that many commentators remarked on the Fed’s use of several indicators as worrisome. In years past, there was great praise for Alan Greenspan just because he used to discuss looking at various pieces of data in his bathtub or whatnot. Now the market finds such alchemy to be less comforting. That may at least be a sign of maturity. Or, perhaps, the Fed has through years of communication efforts changed the markets’ belief that the Fed chair should be this omniscient presence in the market. If so, that bodes well for what is usually an awkward transition between Fed chairs. This may make that much easier, regardless of what Yellen said.