After much buildup early in the year about the Federal Reserve’s June policy meeting, the event has now come and gone with no action by the central bank. Short-term interest rates remain pinned near zero and the Fed continues to wait for more evidence of a pickup in inflation and sustained job gains before it is prepared to act. Still, the meeting and Fed Chairwoman Janet Yellen’s responses to questions in a press conference left investors and the public with plenty to consider. Here are some takeaways:
An Elusive Roadmap for 2015: Two Fed officials see no rate increases this year, five see one interest rate increase, five see two rate increases and five see three rate increases, according to the Fed’s rate projections. Throw out the projections of hawks who want three increases and doves who want none, and a split emerges at the center of the Fed between those who want two and those who want one. If the Fed does two, it seems likely they would come in September and December. If it does just one, it could go in September and then wait to see how the economy responds before acting again in 2016, or it could wait until December. The flow of economic data will dictate which way this plays out.
The New Gradualism Mantra: Ms. Yellen is trying to get markets to focus less on when the Fed will make its first interest rate move and more on the path of interest rate increases once the Fed starts raising. Her message is that increases will be gradual and shallow. The commitment to a gradual path didn’t show up in the Fed’s formal policy statement, but Ms. Yellen said the public can effectively interpret the Fed’s policy statement to be saying as much. “The last paragraph of the Federal Open Market Committee statement says the committee currently anticipates that even after employment and inflation are near mandate consistent levels, economic conditions may for some time warrant keeping the target federal funds rate below levels the committee views as normal in the longer run. That’s kind of a mouth full. It is a long sentence. But I think the spirit of that sentence is consistent with my use of the word gradual.”
Believe it When they See It: One quote that got underlined in my notes during the press conference: “My colleagues and I would like to see more decisive evidence that a moderate pace of economic growth can be sustained.” The Fed has been burned many times in this expansion by growth forecasts that didn’t hold up. Ms. Yellen has little inclination to move until she sees strong evidence in the data that it can be justified.
Yellen’s One Hawkish Note: New York Fed President William Dudley said in the footnote of a recent speech that in retrospect the central bank should have raised interest rates more aggressively in the 2004-2006 rate cycle than it did. Ms. Yellen said he might be right. “Conceivably I think with the benefit of hindsight it might have been better to raise rates more rapidly or more during the 2004 to 2006 cycle,” she said in response to a question. The lesson she took from that episode was that the Fed shouldn’t, and won’t, get trapped in a mechanistic path of rate changes this time around as it did then, when it moved rates up in a steady and predictable path of 17 straight quarter percentage point increases.
‘Leave Us Alone:’ Given a chance in the question-and-answer session to stake out some common ground with lawmakers about efforts to reform the Fed in the wake of the financial crisis, Ms. Yellen showed no evidence that she sees much common ground. Lawmakers have tried a number of different approaches including congressional audits of Fed decisions, a blue ribbon panel to evaluate the Fed’s structure, a requirement that it follow a specific monetary policy rule. Ms. Yellen didn’t sound in favor of much of anything. “I would ask, what exactly is the problem?” Ms. Yellen said. “I’m not certain what the problem is that needs to be addressed.”
