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Did Markets/Traders Overreact to Fed Chairwoman's Yellen's Comments?

10:05AM Mar 20, 2014
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via a special arrangement with Informa Economics, Inc.

Veteran Fed watchers say yes, but note Yellen should have been more cautious in interest-rate hike timing

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

Some Fed watchers say traders overreacted to Fed Chairwoman's Yellen's comments during her press event on Wednesday. Still, her comments about the central bank's outlook for short-term interest rates rattled markets on Wednesday.

The Fed said intends to keep short-term rates near zero into next year, but some observers saw signs that rate increases might come a bit sooner and could be more aggressive than expected. But the Fed's official policy statement noted continued low rates far into the future and Yellen played down rate-increase expectations.

Yellen suggested that interest-rate increases might come about six months after the bond-buying program ends — a conclusion that could come this fall. But she noted many caveats.

The Fed pulled back to $55 billion from $65 billion its monthly bond-buying program. It was the third reduction in the bond purchases since December. The central bank also rewrote its guidance about the likely path of short-term interest rates, putting less weight on the unemployment rate as a signal for when rate increases will start. It said instead that the Fed would look at a broad range of economic indicators in deciding when to start raising short-term rates from near zero, where they have been since December 2008.

The Fed said it would be watching a "wide range of information," including measures of job market conditions, inflation and financial market developments. Yellen mentioned 10 different labor-market indicators she is watching.

Also, the Fed's official policy statement included a new line noting that officials expect to keep rates lower than normal even after inflation and employment return to their longer-run trends.

Comments: Of note, the policy statement said the Fed's stance on interest rates hadn't changed. Still, Fed watchers said Yellen should not have put a timeline out there at all, and that she should have just said any increase in interest rates will be dictated by economic performance,

Low US inflation a key Federal Reserve barometer. The Federal Reserve's preferred gauge of inflation, known as the personal consumption expenditures deflator, has been below the central bank's 2 percent goal for 21 consecutive months and was at 1.2 percent in January from a year earlier. The index has fallen below 1 percent three times in the past year and has never exceeded 1.5 percent. The last time inflation based on the Fed's measure was so low during an expansion was in 1998.


NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.