Fed turns hawkish, or fumbles message: James Saft

March 19, 2014

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

(Reuters) – The Federal Reserve is telling us that not much has changed in the economy except rates are going to go up faster.

That is either growing hawkishness or a communications flub by Janet Yellen in her first Federal Open Market Committee press conference.

Today’s FOMC announcement didn’t change much in terms of the Fed’s economic outlook. The employment outlook is ever so slightly more positive but GDP forecasts for this year were taken down a modest peg. That excepted, the FOMC doesn’t see much difference between today’s economy and the one they described in December. There is a slight weakening. Other than that, the committee does not appear to be expecting much difference in the economy relative to the outlook in December.

Things seem a bit weaker than January, but bad weather obscures the true state.

“You have to read this statement as risk off,” Steven Englander, a strategist at Citigroup, said in a note to clients.

“Other than the very short-term bounce from the bad weather of this winter, supply-side projections are weaker, not stronger, but rates projections are higher.”

According to the Fed’s own projections, fed funds can be expected to be higher in the future than they thought in December. The median projection by FOMC officials was for an end-2015 rate of 1 percent, as against 0.75 percent in December. Rates at the end of 2016 are seen at 2.25 percent, up 50 basis points compared to December’s forecasts.

If you ask me, an economy which is getting stronger at the same languid rate but is seeing interest rates rising faster is one seeing real tightening in monetary conditions.

Perhaps even more importantly, Janet Yellen during her press conference indicated that rates might be expected to rise six months after the taper is done and QE ends. That puts the first rate rise in the first several months of next year, a good bit sooner than markets had been anticipating.

“It depends what conditions are like” in the labor market, Yellen said, by way of hedging, also noting that the Fed might hold if inflation stays low.

Still, the central forecast is for getting higher rates without getting much of a recovery.

That’s terrible for financial markets, which are duly selling off.


Interesting too that Yellen, in her first press conference as Fed chair, argued that we should be paying more attention to the statement, which was a record 877 words, than to the hard data in the charts and forecasts of the economic projections.

Words, as any lawyer will tell you, are inexact in their meaning, a state to which the FOMC statement always seems to aspire and usually reaches.

That desire, if that is what it is, for wiggle room, was also underscored by the decision to drop the 6.5 percent unemployment rate threshold.

Two options seem possible to me:

1 – That the Fed is more hawkish, but doesn’t really want to discuss it that openly.

2 – That giving the impression of rates going up more quickly was a bit of a communications fiasco.

If we look at the first it is significant that Yellen said that some Fed officials “note that the potential growth rate of the economy may be lower at least for a time.”

If potential growth rate of the economy is lower, keeping low rates won’t give you as much bang for your buck, but will still potentially distort markets and the economy. That’s an argument for raising rates sooner, a sort of argument of exhaustion with low rates.

The Fed also seems to see normalization of rates but sees that normal as being lower than before, another nod to lower potential growth. That’s a sclerotic, stagnant economy, and a disaster for risk assets.

Now on the other hand, as is so often the case, the Fed may look around at the falls in financial markets and re-think their position. Yellen may simply have made a rookie mistake in being so specific about the timetable, and may wish for a do-over.

It is very possible that we see a row back, a bit more dovishness, in the next week or so from Fed officials.

If not, Santa Claus Fed – that old tendency for the market to usually rise around FOMC meetings – may be a thing of the past.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)


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