Fed’s Yellen Q&A Comments on Taper, Interest Rate Rise Spook Dow

05:51PM Mar 19, 2014
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via a special arrangement with Informa Economics, Inc.

Yellen Q&A remarks appear to be interpreted as departure from Fed views

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Remarks by Fed Chairwoman Janet Yellen that the Fed would end its asset purchase program in the fall of 2014 and that interest rates could rise perhaps six months after that program ends prompted a major swoon in the Dow Jones Industrial Average of more than 200 points.

In her initial remarks, Yellen indicated that the asset purchase effort would come to an end “next fall” and that interest rates would not rise for a while after that point. In responding to a question seeking clarification on what “next fall” meant – the fall of 2015 or the fall of 2014 – Yellen said that meant the fall of 2014 or “this fall.” Further, when asked about interest rates, Yellen suggested “something on the order of six months, or that type of thing” after the asset purchase end may be a possibility.

While echoing the Fed’s mantra that any moves on interest rates or the tapering of asset purchases will be dependent on the economic conditions, markets did not initially “hear” that portion of her response.

The downdraft in the Dow emerged as many appear to have interpreted the “next fall” as being in 2015 not 2014 and her comment that six months later (which would be around April 2015) as a possibility for rates to rise came in contrast to many thinking that possibility was at the end of 2015 if not early 2016.

Other highlights of her session with reporters:

-- Russia/Ukraine situation: Yellen confirmed that was indeed talked about by the FOMC and she also noted she could not provide any guidance on a question asked about whether Russia had moved $100 billion out of US Treasuries in an attempt to thwart the impact of any sanctions. In the Fed’s discussion of the situation, Yellen noted that revealed there are “not large” direct linkages in the Russian and Ukraine banking systems, “but obviously there are geopolitical risks here.”

-- Will there be changes in the Fed focus vs a Bernanke-led Fed: “In terms of the conduct of business, it’s pretty much the same.” Yellen observed. “I’m not envisioning any radical changes.” She also noted that her position atop the Fed now compared with her prior Vice Chair role means, “the buck stops with me,” adding, “I feel that weight of responsibility keenly in the new role that I have.”

-- Weather impact: The FOMC post-meeting statement noted the weather impact, and Yellen was asked to expand further on that situation. “It’s an important factor,” Yellen stated. “It’s not the only factor.” In addition, the FOMC believes the weather-related impacts will “wash out” in the second quarter and prompted an economic rebound beyond that.

Comments: Well, Yellen has now found out what happens when comments by a Fed Chair appear to stray from the position outlined in the FOMC statement. While attempting to caution that Fed moves in the future will be dictated by economic data, her putting what markets perceived as specific timelines down helped to foster the market drop. Once the post-FOMC blackout period is lifted, expectations are that several Fed officials may well seek to hammer the point home that policy is not on a preset course and that the economic data coming in will dictate how and when the Fed adjusts its policies. Still, Yellen calmly handled the questions from reporters in her first meeting with the press as Fed Chair and no doubt will keep the market response in the back of her mind in the future when it comes to these events.

The Dow did recover a chunk of the decline by the closing bell, but still did not retake the entire downturn. Welcome to being the Fed Chair, Ms. Yellen.


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