Tag Archives: janet yellen

Janet Yellen says rate hike ‘appropriate’ soon

CNN Money, May 27, 2016

Janet Yellen gave a big hint Friday that interest rates could go up in June or July.

“Probably in the coming months such a move would be appropriate,” Yellen, the Federal Reserve chair, told Harvard professor Greg Mankiw at an awards reception in Cambridge, Mass. She didn’t specifically say June or July.

It all hinges on the economy continuing to hum — at home and abroad. At the moment, Yellen and her Fed colleagues sound optimistic.

“The economy is continuing to improve,” Yellen said Friday. “Growth looks to be picking up from the various data that we monitor.”

It’s notable that Yellen did not mention the overseas problems in China or Europe. Concerns about the fragile conditions abroad have kept the Fed on hold.

On Friday, U.S. economic growth for the first quarter was revised up slightly to 0.8% from 0.5%. America has often had a lousy start to the year. The key is whether growth picks up in the spring. So far, that looks like it will happen.

The Atlanta Fed forecasts second quarter growth rising close to 3%, and other signs are encouraging. New home sales jumped up significantly in April as did U.S. retail sales, which rose the most in over a year. Even wage growth has shown some signs of life.

Against that backdrop, the Fed has tried to get investors and other world leaders ready for a summer rate hike. As recently as May 13, Wall Street predicted a 7.5% chance of a rate hike in June. Expectations had risen to 24% before Yellen’s speech. After her comments Friday, the odds shot up to 34%, according to CME Group.

The Fed raised rates in December for the first time in nearly a decade. It was a landmark moment, a sign of how far the U.S. economy had recovered since the Great Recession.

“The Fed’s handling of the financial crisis once it was upon us was nothing short of magnificent,” Yellen said Friday. She credited her predecessor Ben Bernanke for his innovative thinking.

Yellen admitted that while she doesn’t see a recession on the horizon, the Fed would have limited tools to deal with it. The typical response is to cut interest rates 400 or 500 points. Right now, interest rates aren’t even at 50 points, so there’s little to cut.

“We have limited scope for responding. It’s an important reason for caution.” she said.

It’s possible that headwinds could hold back the Fed form raising rates this summer. China’s economic growth continues to stall, affecting almost all developing countries, which represent a major block of U.S. trade. Concerns are also brewing about the British referendum vote — Brexit — on whether to stay in the European Union. The Brexit vote is June 23, only a few days after the Fed’s meeting.


Will the Fed raise rates before the election?

CNN Money, Apr 27, 2016

yellen election

The probability of the Federal Reserve hiking rates today is 0%. So what about the rest of the year?

Fed Chair Janet Yellen keeps telling the world that any further rate hikes will be “data dependent.” Watch the numbers on wages, jobs, inflation, financial markets and China. The rosier it looks, the more likely the Fed will raise rates.

But there’s one big factor this year that the Fed rarely mentions: the U.S. presidential election.

The Fed has a lot of power over the economy and stock markets. How the economy fares could sway the election outcome. Former President George H. W. Bush pins his 1992 election loss on former Fed chair Alan Greenspan.

Raising rates too soon can also rattle the stock markets. It can also crush consumer and business confidence. Any economic pullback would likely hurt a Democrat’s chances to win the White House. That’s the reason why Donald Trump has blasted the Fed for manipulating interest rates to help Obama.

Yellen bristles at any suggestion of such impropriety.

“I have never seen political views in any way influence the policy judgments that are made inside the Federal Reserve,” Yellen said in March when asked about it.

But the question remains: would the Yellen Fed, which is already cautious, really pull the trigger to raise rates before Election Day? After April, five Fed meetings remain this year: June 15, July 27, September 21, November 2 and December 14. Four of those occur before voters go to the polls.

Beyond what Trump says, a lot of eyebrows were raised when Lael Brainard, a member of the Fed’s committee that sets interest rates, donated $2,700 to Hillary Clinton’s presidential campaign. The Fed didn’t comment for this story.

yellen election

Trump blasts the Fed for bias

Trump, in an interview with The Hill in the fall, accused Yellen of keeping rates low because “Obama doesn’t want to have a recession-slash-depression during his administration.”

Experts who have watched the Fed for years (or served on it) say Trump is off on this one.

“There’s no definitive evidence that suggests the Fed is putting its thumb on the scale” to help any particular party or candidate, says Sarah Binder, a senior fellow at the Brookings Institution and political science professor at George Washington University.

The history of the Fed

But President George H. W. Bush disagrees.

“I think that if the interest rates had been lowered more dramatically that I would have been re-elected president because the [economic] recovery that we were in would have been more visible,” Bush told The Wall Street Journal.

There are even more questions around Richard Nixon. White House transcripts reveal heated conversations between Nixon and then Fed chair Arthur Burns. Nixon pressured Burns to pump more money into the economy, which the Fed did heading into the 1972 election.

The Fed has raised and lowered rates many times during election years. There are always economic reasons for the actions, making it hard to argue political bias was a decisive factor.

The influence of Election 2016 on the Fed could be more subtle.

Pressure to hold rates low?

“I wonder if there’s a subconscious bias,” says Tim Kane, an economist at the Hoover Institution.

He notes that the economic talk on the 2016 campaign trail from both parties has been overwhelmingly negative. It creates pressure on the Fed to keep rates low to boost the economy. The current key interest rate bandwidth is at a mere 0.25% to 0.5%.

Heading into 2016, the Fed implied it would raise rates four times this year. That’s already been scaled back to just two

Fed defends its independence

The Fed has long defended its independence from politics. The building may be located on Constitution Avenue in Washington D.C., just a few blocks from the White House and Congress, but the Fed argues it acts based on economic data, not polling data.

Bloomberg first broke the news of Fed governor Brainard’s contribution to the Clinton campaign. She has given the highest donation possible for an individual.

“When I was appointed [to the Fed], I chose not to participate in politics in any way,” says Mark Olson, who served on the Fed’s policy setting committee from 2001 to 2006, and is now chair of Treliant Risk Advisors.

What Brainard did was legal and her political leanings aren’t a surprise since she worked in the Obama administration. But Olson, a Republican, says the expectation is for Fed members not to do anything to create a perception of bias, especially political bias.

June move?

If caution and perception are the guiding principles of the Yellen Fed, it could be difficult for the Fed to act too close to the election. That raises the stakes even more for a June move.


Yellen Takes Control of Fed Message to Stress Gradual Approach

Bloomberg, Mar 30, 2016


* Fed chair spells out what officials need to see for rate hikes
* Data dependence places dollar, growth abroad in sharp focus

Federal Reserve Chair Janet Yellen spelled out on Tuesday what she means by data dependence, asserting her leadership of the U.S. central bank with a clear message that interest rates will be raised at a cautious pace.

In one of her most detailed policy discussions this year, Yellen gave investors a list of conditions they need to watch for future rate hikes. Here they are:

  • Foreign economies and their financial markets need to stabilize.
  • The dollar can’t appreciate further. That would depress inflation and exports, and hurt U.S. manufacturing.
  • Commodity prices need to stabilize to help foreign producers find a better footing for growth.
  • The housing sector needs to make a larger contribution to U.S. output.
  • Inflation is a two-sided risk: Yellen is skeptical that the recent rise in core inflation, which strips out food and energy, “will prove durable.” She is watching closely.

Taking Charge

For all their efforts at transparency, Yellen’s speech in New York showed that communication by the Federal Open Market Committee, the panel that sets U.S. interest rates, sometimes means the leadership taking charge to hammer down a guiding view. That can be hard with a group that currently numbers 17 participants. Still, in times of uncertainty, it is the chair’s job to step up and describe the challenges and possible outcomes for policy.

“I thought it was her best performance since she has been chair,” said Michael Gapen, chief U.S. economist at Barclays in New York. “In the absence of unity, the chair has to exert leadership and it felt like she exerted that.”

Officials this month left their target for the federal funds rate unchanged at 0.25 percent to 0.5 percent and signaled a slower pace of rate hikes in 2016 than they’d expected in December, before concerns over Chinese growth sent a spasm through global financial markets.

However, following the March 15-16 FOMC meeting, a number of regional Fed presidents, including James Bullard of St. Louis, Patrick Harker of Philadelphia and Dennis Lockhart of Atlanta, signaled they would like to see rates rise further, pointing to the possibility of a move at the next FOMC meeting on April 26-27.

Rate Path

While the Fed chair steered clear of telegraphing an April or June rate hike, that was probably intentional. Neither she nor anyone else on the FOMC knows if the global climate for growth will have improved enough by then to warrant action.

For that reason, Yellen also drove home the message that when officials don’t know, they either don’t change policy at all, or only move gradually. That means making progress in the current tightening cycle isn’t about the Fed following a pre-set course of rate hikes, but acting when conditions are right. In a way, it takes a page from previous Fed playbooks.

During the chairmanship of Alan Greenspan, Fed officials spoke about “opportunistic disinflation,” or a strategy of moving interest rates early in an economic cycle to clip off the inflation impetus that was embedded in the economy at that time. Today, the Yellen Fed is coming from the opposite direction — letting the economy run hot and only raising interest rates when it won’t upset fragile balances in the global economy and financial markets.

‘Proceed Cautiously’

The Fed chair said it was appropriate to “proceed cautiously.” One sentence later she said “caution is especially warranted.” If her audience at the Economic Club of New York still didn’t get the message, a footnote in the text of her speech stated “uncertainty and greater downside risk” when the Fed’s policy rate is so close to zero “call for greater gradualism.”

“They really mean they are data dependent and willing to be patient,” said Laura Rosner, U.S. economist at BNP Paribas in New York, whose firm predicts no further rate increases for 2016 or 2017. “She is saying, ‘We have started this process and don’t have to continue if not warranted.”’

While the committee continued to suspend its assessment of the balance of risks to the outlook in the March statement, Yellen clearly saw more risks to the downside, said Ward McCarthy, chief financial economist at Jefferies LLC in New York.

“What I learned is just how little weight they gave to their own baseline and how much weight they put on a plethora of downside risks,” he said.

All Embracing

Another insight from the speech, McCarthy said, is the “wide range of things” data dependence covers.

For example, just looking at the Fed’s domestic mandate of employment and inflation, it looks like the central bank should be raising rates further this year.

The unemployment rate of 4.9 percent in February sits just above officials’ estimate of 4.8 percent consistent with full employment — one half of its dual mandate from Congress. The other is price stability. Core inflation measures are rising. Still, the FOMC median estimate for the appropriate pace of rate increases this year was halved in March from four hikes projected in December.

“We are looking at a whole variety of factors that impact the outlook for the U.S. economy,” Yellen said in the question-and-answer session following her speech.

If Fed officials had stuck with their December forecast for four rate rises this year in the face of slowing global growth, it could have been bad news for U.S. inflation and unemployment, she explained.

“Ideally, we want to get ahead of that,” she said. “The market response has been favorable.”


Yellen Says Caution in Raising Rates Is ‘Especially Warranted’

Bloomberg, Mar 29, 2016


* Yellen cites global growth, oil prices, China as risks
* Fed Chair makes case for go-slow changes with rate near zero

Federal Reserve Chair Janet Yellen said it is appropriate for U.S. central bankers to “proceed cautiously” in raising interest rates because the global economy presents heightened risks.

The speech to the Economic Club of New York made a strong case for running the economy hot to push away from the zero boundary for the Federal Open Market Committee’s target rate.

“I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said in the text of prepared remarks Tuesday. “This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”

Fed officials left their benchmark lending rate target unchanged this month at 0.25 percent to 0.5 percent while revising down their median estimate for the number of rate increases that will be warranted this year to two hikes, from four projected in December.

Yellen said the FOMC “would still have considerable scope” to ease policy if rates hit zero again, pointing to forward guidance on interest rates and increases in the “size or duration of our holdings of long-term securities.”

Other Tools

“While these tools may entail some risks and costs that do not apply to the federal funds rate, we used them effectively to strengthen the recovery from the Great Recession, and we would do so again if needed,” she said.

Fed officials’ quarterly economic forecasts for the U.S. didn’t change much in March, while Yellen stressed in a March 16 press conference that their sense of risks from global economic and financial developments had mounted.

Yellen mentioned two risks in her speech. Growth in China is slowing, she noted, and there is some uncertainty about how the nation will handle the transition from exports to domestic sources of growth. A second risk is the outlook for commodity prices, and oil in particular. Further declines in oil prices could have “adverse” effects on the global economy, she said.

Since the March meeting, Fed officials have seen more evidence that the pace of domestic growth may be slowing. U.S. gross domestic product decelerated to 1.4 percent pace in the fourth quarter, while the Atlanta Fed’s GDPNow estimate for the first quarter is 0.6 percent, partly due to slower rates of consumer spending growth.

On the other hand, inflation measures have shown a trend of gradual firming. The personal consumption expenditures price index minus food and energy rose 1.7 percent for the year ended February, the fastest pace in three years.

Yellen said she was confident that inflation would gradually return to the Fed’s 2 percent goal over time, while noting that the course of prices was a two-sided risk.


What still scares the Federal Reserve

CNN Money, Dec 22, 2015

What still scares the Federal Reserve

Alan Greenspan calls the job of being America’s top central banker “torture.”

Current Federal Reserve chair Janet Yellen just raised interest rates for the first time in nearly a decade. By all accounts, the rate hike last week was smooth and successful. Yet Yellen doesn’t get much of a victory lap. Already the questions are coming: what’s next?

Yellen put the chance of a U.S. recession next year at about 10%.

But even beyond the “R-word,” Yellen will have to deal with a number of problems. No one likes uncertainty. And right now, the Fed is serving up a lot of it by sending mixed signals.

Last week, the central bank said the economy was doing pretty well and its forecasts implied four more interest rate hikes next year. But Yellen repeatedly stressed that the Fed would go slow because there are real risks to the economy and markets. She used the word “gradual” 13 times and “accommodative” (think low rates) seven times.

The key to understanding where the U.S. economy and the Fed are going in 2016 is to think about what could go wrong. What are the shocks that keep the Fed up at night?

1. No inflation

By far the biggest stress for members of the Fed is that inflation is AWOL.

“What scares them is inflation. It’s been about inflation all year,” says Ellen Zentner, chief U.S. economist at Morgan Stanley. She correctly predicted that the Fed wouldn’t raise rates until this December.

The Fed’s target is 2% inflation. Its preferred inflation metric is running at 0.4%.

For regular Americans, the absence of inflation isn’t so bad. It means prices on everything from gas to housing to clothes aren’t going up much.

But economists on Wall Street and at the Fed believe that a healthy economy has at least some inflation. Think about inflation like your heartbeat going up when you exercise. It’s a good sign you’re working hard.

Yellen continues to believe this ultra-low inflation is just a passing fad. But the Fed statement and Yellen’s remarks last week stressed that the policy committee was “carefully” and “closely” watching to see if inflation picks up in 2016.

“We have a significant shortfall on inflation, so we are calling attention to the importance of verifying that things evolve in line with our forecasts,” said Yellen.

Zentner takes that to mean she actually needs to see data showing an uptick before raising rates again. She thinks that isn’t going to happen for awhile, so the Fed probably won’t raise rates again until June — and thus only do three, not four, rate hikes next year.

“(Yellen’s statement) really raises the bar on what it will take to raise [rates] further,” says Zentner.

2. China

The wild card for 2016 is China. The economic slowdown there has thrown a number of countries like Brazil and Canada into recession.

It’s hard to get a good read on what’s going on in China because the government statistics are so unreliable. The Community Party says the worst is over after the Chinese stock market meltdown over the summer, but the government has a tendency to tinker and intervene.

The exchange rate snafu in August caused such a severe negative reaction around the world that the Fed didn’t raise interest rates in September, as had been widely expected.

“The Fed is concerned about the stability of global markets. They are very dependent upon each other,” says Tony Bedikian, managing director of global markets at Citizens Bank.

The U.S. economy has held up well despite China’s problems. Spending by American consumers and companies is the main driver of economy — accounting for about 85% of economic activity. So China’s influence is small, but it’s there.

The global economic headwinds from China and elsewhere have also helped keep inflation down in America.

“If we continue to import a good deal of deflation from China, that spells uncertainty around the outlook for inflation,” says Zentner of Morgan Stanley.

3. What will the market do?

What’s hardest for the Fed to manage in 2016 is the markets.

The first rate hike in December was basically proceeded by a big blinking sign that said “it’s coming.” That’s why the reaction was small and went as expected.

But already the Fed and Wall Street aren’t in sync. The Fed is implying four rate hikes next year and most Wall Street economists predict only two or three.

Big problems pop up when the Fed and the markets aren’t on the same page.

The Fed seems to want to avoid the mistakes of the 2004 rate tightening cycle where the Fed telegraphed it would raise rates 25 basis points at about every meeting.

“It didn’t have the tightening effect that it was supposed to. That led to too much overheating too quickly,” says Zentner of Morgan Stanley.

The Fed is doing everything it can to say that’s NOT the plan this time. But, of course, that brings uncertainty.

The stock market is on track for its worst year since the 2008 financial crisis. The S&P 500 is likely to end with a loss. If that downturn worsens in 2016, it will make it very hard for the Fed to justify more rate hikes.

“We have been and will continue to track developments in financial markets very carefully,” said Yellen.