Janet Yellen and other officials at the Federal Reserve are laying the groundwork for a long-awaited rate increase in December, even as some of the economic data has weakened.
A number of small-scale moves from the central bank suggest that it is preparing the markets for the possibility of raising interest rates from zero for the first time since the financial crisis.
In its announcement Wednesday, the Fed’s monetary policy committee said it would look at incoming data in deciding whether to raise rates at the “next meeting.”
The last time the Fed used that phrase, in December 1999 under then-Chairman Alan Greenspan, it raised rates at its next meeting.
Federal Reserve Bank of San Francisco President John Williams, a voting member of the monetary committee, said Friday that the group included the phrase to avoid surprising investors if it did raise rates.
“There was a lot of commentary I heard that the Fed is going to be on hold until next year,” Williams told the Associated Press.
That is only one of the steps that Yellen and company are taking to prepare markets for the possibility of a rate increase.
Yellen will have three high-profile appearances in the weeks leading up to the meeting on Dec. 15 and 16, giving her plenty of opportunities to prepare people betting on interest rates.
Next week, the Fed chairwoman will testify before the House Financial Services Committee. On Dec. 2, she will give a speech at the Economic Club of Washington. The next day, she will testify before the Joint Economic Committee.
Each of those appearances will be part of the laborious process of avoiding major surprises.
The full public schedule likely means that Yellen “wanted to have the opportunity to really prep markets and the public in the case that they do decide to move forward with policy normalization,” said Laura Rosner, U.S. economist for BNP Paribas.
By contrast, Yellen did not make any public appearances in the month leading up to the Fed’s September meeting, a meeting that many investors thought might see the first rate hike. Like December, September’s meeting was one of the four each year that features a press conference by Yellen afterward, creating the perception that it might be more likely to feature a big policy change.
On Friday, the odds of a rate hike in December implied by bond markets rose to above 50 percent, after being closer to 30 percent before Wednesday’s policy announcement.
That shift comes even as the economic data have cast some doubt that the Fed’s objectives are closer to being met.
The Fed said in its announcement that it is looking for evidence that will make it “reasonably confident” that inflation is rising toward its 2 percent target.
On Friday, the Bureau of Economic Analysis reported that inflation slowed from 0.3 percent to 0.2 percent in the measure that the Fed uses for its target. Even stripping out volatile changes in the prices of food and energy, inflation was flat at 1.3 percent.
Meanwhile, the Bureau of Labor Statistics reported Friday that wages grew at the same relatively slow 2.1 percent annual rate that they have grown in recent months, suggesting a lack of upward pressure on prices from rising wages.
Yellen has said that she views low inflation as mostly driven by factors that are likely to prove temporary, such as the drop in oil prices and rise in the dollar.
But long-term inflation expectations, which Yellen views as the key to the belief that inflation will rise, also slipped in the University of Michigan survey of consumers released Friday.
The drop in consumer inflation expectations to the lowest level since 2002 is meaningful for the Fed’s plans, Rosner said. “Right now, according to the University of Michigan survey, people are expecting lower inflation over the next five to 10 years than they were expecting at any point during the financial crisis. That, to me, is surprising and definitely something worth monitoring.”
For her part, Rosner does not expect the Fed to raise rates until March, although she said she saw a higher probability of a December rate hike after this week’s events.
