Janet Yellen didn’t gaffe
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.