Yellen and her colleagues surprised many investors last September when they decided not to raise rates from the near zero percent levels that had prevailed since 2008. Policy makers then switched their stance in October by clearly signaling that a rate hike was imminent, before moving in December.
Financial Turbulence
The rate increase -- the first in nine years -- at first went off smoothly. The financial markets though turned turbulent in the new year after China allowed a small depreciation of its currency, fanning fears of a bigger devaluation to come. Uncertainty about the Fed’s plans also fueled the turmoil as investors increasingly questioned the interest rate path set out in the central bank’s so-called dot-plot.
One problem: The central bank’s quarterly rate forecasts -- arranged in little circles representing each Fed officials’ projection for the appropriate level of the benchmark federal funds rate -- become stale as new data arrive.
St. Louis Fed President James Bullard, a voting member of the FOMC this year, said in a Bloomberg interview last week that the rate projections contribute to uncertainty among investors.
Fels said Yellen’s effort to get the Fed’s message over to markets also is complicated by the cacophony of voices from within the central bank itself opining on policy and the economy. “There are quite a few people commenting and the message is not often the same,” he said. Bullard said on March 24 the next rate hike “may not be far off,” and other Fed officials have also pointed to the possibility of an April move.
In the end, the Fed chair’s willingness to outsource monetary policy to the markets will probably come down to whether she agrees with how investors are responding to changes in the economy. It might be a case of “validating the market when it’s telling you what you may have been leaning toward anyway,” Feroli said.