Janet Yellen didn’t gaffe

By Felix Salmon
March 21, 2014
received opinion that Janet Yellen made a “rookie gaffe” in her first press conference as Fed chair, thereby “rattling markets”. She didn’t.

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It’s become received opinion that Janet Yellen made a “rookie gaffe” in her first press conference as Fed chair, thereby “rattling markets”. She didn’t.

According to Peter Coy, Yellen made a “substantial blunder”. John Cassidy says she “got into trouble” when she told Reuters’ Ann Saphir that the Fed would wait “something on the order of around six months” after QE ends before starting to raise rates. Clive Crook was so perturbed by the presser that he is beginning to doubt the wisdom of the Fed having any kind of forward guidance at all. Mohamed El-Erian seems inclined to agree: the markets aren’t mature enough, he says, to internalize new information without over-extrapolating (i.e., freaking out).

But here’s the thing: the market didn’t freak out. The chart above shows the benchmark US interest rate — the yield on the 10-year note. The chart gives you a reasonably good idea of what normal volatility is: last Thursday, for instance, the yield fell by a good 10bp when John Kerry made noises about imposing sanctions on Russia. And overall, the yield has stayed comfortably in a range between 2.6% and 2.8%.

What’s more, the big FOMC-related move in the 10-year bond yield happened immediately at 2pm, when the statement was released. Yellen’s “gaffe” caused barely a wobble.

So why does everybody think that Yellen blundered? The answer is simple: they were looking at the stock market (which doesn’t matter), rather than the bond market (which does). Stocks fell, briefly; not a lot, and not for long, but enough that people noticed.

Which is good! In general, Yellen should be more transparent, not less, which means that she shouldn’t be overly cautious about what she does and doesn’t say in her press conferences. Her instinct to give a straight answer to a straight question is a good one. And if Yellen’s straight talk causes a very, very small uptick in stock-market volatility — well, that might not be such a bad thing, given that stock-market volatility is pretty low at the moment and that stocks should be pretty twitchy at these levels. What’s more, we don’t want to go back to the bad old days of Alan Greenspan, where the Fed was always assumed to have failed if it did anything which caused stock prices to fall. Yellen is going to oversee a series of interest-rate rises, and it’s entirely likely that stocks will pull back when that happens. That’s no reason to criticize her.

In fact, Yellen did more than just improve the transparency of the Fed with her remarks; she also helped prepare the markets for a wider range of possible outcomes. If the Fed does end up tightening six months after QE ends, the markets might be disappointed, but the Fed would be justified in taking a “don’t say we didn’t warn you” stance. That doesn’t mean it will happen, but it does mean that Yellen is helping to prepare the markets for the inevitable uptick in uncertainty.

As I explained back in October, transparency and predictability are incompatible goals; Yellen should go for the former, rather than the latter. The Fed’s future actions are unknown, and unknowable, and Yellen needs to be open about that fact. As central banker Adam Posen told Binyamin Appelbaum, there’s going to be increased fractiousness and unpredictability on the FOMC going forwards — and that’s a good thing, a sign that the economy is getting back to normal. If Yellen is keeping the market on its toes, she’s really just giving the markets an early taste of something they’re going to be seeing a lot more of. Traders, and the media, should — must — learn to embrace that, rather than criticizing it.

4 comments

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26تحذير
قد تكون مراقب
هل تستخدم امريكا و اسرائيل الانترنت بمواقعه ( يوتيوب, فيس بوك, تويتر,غرف الشات..) للتجسس!
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do usa & israel use the internet ( youtube, facebook, twitter, chat rooms,ect…)to collect informations,,,,can we call that spying ?do they record&analyse everything on the internet?
they ask for ur name,age,gender,occupation,place of work,ur mobile number………….ect, can they harm you using these informations?!
تحذير
قد تكون مراقب
هل تستخدم امريكا و اسرائيل الانترنت بمواقعه ( يوتيوب, فيس بوك, تويتر,غرف الشات..) للتجسس!
warning you may be watched
do usa & israel use the internet ( youtube, facebook, twitter, chat rooms,ect…)to collect informations,,,,can we call that spying ?do they record&analyse everything on the internet?
why they ask for ur name,age,gender,occupation,place of work,ur mobile number………….ect, can they use these informations in a way that may harm you?!
تحذير قد تكون مراقب
هل تستخدم امريكا و اسرائيل الانترنت بمواقعه ( يوتيوب, فيس بوك, تويتر,غرف الشات..) للتجسس!
warning you may be watched
do usa & israel use the internet ( youtube, facebook, twitter, chat rooms,ect…)to collect informations,,,,can we call that spying ?do they record&analyse everything on the internet?
they ask for ur name,age,gender,occupation,place of work,ur mobile number………….ect, can they harm you using these informations?!

Posted by midoibrahim | Report as abusive

The 10 30 Yield Curve steepened after Yellen’s first Fed meeting and a chart analysis of the Steepner ETF, STPP, shows it steepening. It is the bond market response that is important, and that response was post-Yellen.

Citing Susanne Walker of Bloomberg Benson te writes “The spread between the longer end of the curve particularly the 10 year notes and 30 year bonds has markedly narrowed [10] which has been indicative that markets are now pricing in higher interest rates.”

I see the facts different, yet the prediction the same. The ongoing Yahoo Finance comparison between the Yield of the US 10 Year Note, ^TNX, and the Yield of the 30 Year US Government Bond, ^TYX, shows for the week ending March 21, 2014, the spread between the shorter end of the curve and the longer end of the curve is increasing. A steepening of the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, seen in the Steepner ETF, STPP, steepening, caused a rise in interest rates destroying Aggregate Credit, AGG.

A comparison between the yield of the US 10 Year Note, ^TNX, and the Yield of the 30 Year US Government Bond, ^TYX shows the post Yellen steepening of yields.

And The 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, shows steepening post-Yellen.

And the chart of the Steepner ETF STPP shows a steepening post-Yellen.

The daily chart of STPP is in consolidation; it is going to spring to life utterly destroying both credit investments and equity investments. A steepening yield curve, and a higher Benchmark Interest, $TNX, rate from 2.75%, coming from the bond vigilantes continuing to call the Benchmark Interest Rate higher, is going to be utterly economically destructive, as well as be terrifically destructive to savers invested in Utility Stocks, XLU, US Government Notes, TLT, and Government Bonds, GOVT, as they will see the basis of their investment depleted.

I agree with Benson te who writes “So we seem on track towards ‘Wile E. Coyote moment’ via the deepening convergence of 3 contravening forces: soaring asset prices (financed by credit) and sustained increase in record debt levels in the face of rising rates (or a tightening environment).“

“The Wile E. Coyote moment will extrapolate to the disorderly unmasking of most of the impossible things the mainstream has come to firmly believe in. Psychological escapism which has evolved out of asset bubbles will see a rude awakening pretty much soon.”

Charts can be found here
http://tinyurl.com/kmgndm8

Posted by theyenguy | Report as abusive

I thought it was a act of genius. Transparency and preparation. “The 5 P’s – prior planning prevents poor performance.” She is far from being a rooky. L.

Posted by 2Borknot2B | Report as abusive

The recovery has been hollow and shaky. Congress is much more concerned with its own, disparate grasping than with the fiscal health of the nation. QE was elegant monetary engineering and it worked, but it has to be paid for and the easiest way to do that is future rate hikes. Money will move in from overseas, creating a mini-chain reaction. Travelers overseas with dollars can buy two of everything. The bankers get paid and domestic manufacture suffers. It’s all a package, folks.

Posted by xaxacatla | Report as abusive