Janet Yellen wasn’t prepared Wednesday with a full explanation of why Federal Reserve officials surprised markets so dramatically earlier this month, the kind of miscommunication that the central bank has tried to avoid and that congressional Republicans have complained about.
On March 1, market odds of the Fed raising rates at its March meeting doubled thanks to comments from Fed officials, despite the absence of any major new economic data. In the space of a week, investors went from seeing a rate hike as an outside possibility to viewing it as a lock, based only on speeches and interviews of Fed members.
In theory, that isn’t supposed to happen. The Fed has long sought to emphasize that its actions are data-dependent, meaning that its next moves should be predictable from indicators such as the gross domestic product, inflation and jobs.
Asked at a post-Fed meeting Wednesday how the market and the Fed got so out of sync over the course of one week, Yellen wasn’t ready with a comprehensive answer.
The Fed’s communications over the past quarter “seem to me to be reasonably consistent,” Yellen said.
She sought to place some of the blame on the markets themselves, saying that the Fed has communicated since December that it was prepared to raise rates gradually if the economy continued to grow as expected, which it did.
She also speculated that investors have become complacent because the Fed raised rates only once each in 2015 and 2016, even though she has sought to explain that the slow one-rate-hike pace in those years was due to one-off international factors. “Perhaps market participants have been influenced by that pattern,” she mused.
Not all Fed watchers were buying her explanation.
“Give me a break,” quipped Paul Mortimer-Lee, chief economist for BNP Paribas Americas, saying that the Fed did shift its rate hike plans in March.
The Fed surprising investors is a sore spot for congressional Republicans, who are expected this year to advance legislation that would require the the central bank to spell out a rule describing its interest rate decisions in terms of economic variables. If the Fed deviated from that rule, the chairman would have to appear before Congress to explain the shift in policy.
