In a speech to the Economic Club of New York on Tuesday, Fed Chair Janet Yellen, emphasized that global economic concerns were an abiding influence on decisions to raise interest rates, despite a U.S. economy that is on track for growth.
Short-term interest rates were unchanged at the Federal Market Open Committee meeting in mid March, when they made only slight changes to a generally rosy forecast for the U.S. economy. This was followed by a sharp reduction to “their projected path of interest-rate rises this year, forecasting a total increase of half a percentage point, down from the full percentage point increase they expected in December,” reported the Wall Street Journal.
In her remarks, Yellen said, “Given the risks to the outlook, I consider it appropriate for the committee to proceed cautiously in adjusting policy.” Without giving any details for April actions by the FOMC, she cited the market upheavals of last summer and early this year, and that these actions cannot be ignored.
“The major thing that’s changed between December and March that affects the baseline outlook is a slightly weaker projected pace of global growth,” she said. “Global developments pose ongoing risks,” she added, specifically citing the risk posed by the economic slowdown in China, and the collapse in the price of oil.
Continuing on this theme the she countered that “we’d want to get ahead of that development and adjust our thinking about the path of policy and act to counteract it.”
Resiliency from the market also triggered self-regulatory actions, Yellen emphasized, “Investors responded to those developments by marking down their expectations for the future path of the federal funds rate, thereby putting downward pressure on longer-term interest rates and cushioning the adverse effects on economic activity.”
In response, the market sent stocks to a high and the price of gold climbed, as the dollar fell. Further north, The Toronto Star reported that ‘the S&P/TSX composite index gained 36.04 points to 13,426.23, reversing a triple-digit decline earlier in the day. Gold stocks led the way, rising almost 4.4 per cent and offsetting declines in the energy, consumer staples and health-care sectors.”
Opinions from all sides were mostly enthusiastic with Michael Wenz, associate professor of economics at of Northeastern Illinois University saying, “It’s noteworthy, and helpful, that Janet Yellen was so specific about where she thinks the equilibrium real rate–zero–is relative to the current real rate– minus-1.25. I think this is pretty telling and that she doesn’t see much need to tighten.”
The Journal quoted Dana Saporta, director of U.S. economics research for Credit Suisse, saying, “There is some confusion about Fed policy in the sense that the Fed keeps saying it’s data-dependent and mentions specific types of data like inflation and employment and then when these indicators start to improve, the Fed doesn’t react as the market might expect,” and “I think she is attempting to explain that surface dichotomy, and I think she was successful in it.”
Wenz also noted that “we are unlikely to see an uptick in household formation, which is one of the channels she thinks might drive growth, until we make progress on student debt. I think this is a real drag on young household formation.”
The Journal also noted that “inflation appears to be rising closer to the Fed’s 2% target, but Ms. Yellen said she wasn’t convinced recent price increases were a sure sign of improved economic activity,” moving somewhat closer to Wenz’s hopes
Significantly, he also noted that “She also spent a lot of emphasis reminding people that she can still ease if need be.”
There was largely among her own ranks, with many feeling that she was on the right track, but others disagreed,notably, “Atlanta Fed President Dennis Lockhart, often seen as a bellwether of the central bank’s consensus, said last week that “there is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April.”
Lockhart’s opinion is overshadowed by the moment by Yellen’s characteristic caution, but also a certain willingness to change direction if need be, as Wenz noted. Some of this can be seen in the Fed’s traditional 2 percent inflation target, yet which Yellen herself has said, “it could take longer than expected and might require a more accommodative stance of monetary policy.”