Some have been questioning projections made by Janet Yellen on whether or not rates will actually rise in 2015. Apparently, her last speech left investors questioning when the central bank plans to raise short-term interest rates. The Fed is still on track to reduce their monthly bond buying to $45 billion at their meeting this month, but some investors still feel that Yellen gave her audience a vague projection last month.
At the Economic Club of New York last week, Yellen commented, “While monetary-policy discussions naturally begin with a baseline outlook, the path of the economy is uncertain, and effective policy must respond to significant unexpected twists and turns the economy may take”. The vagueness of this statement has left many confused, given that the Fed usually tries to provide concrete information about the outlook of short-term interest rates.
However, now that she has switched to a more mysterious approach, this seems to suggest that slow economic growth, low inflation, and poor measures of unemployment are beginning to slip back into the picture. This contrasts with her statement last month that the Fed may wait six months after the bond-buying ends before raising rates. In regard to the trading markets, investors have reacted relatively calm to the news. Yields on 10-year Treasury notes have remained between 2.5 and 3%. A possible reason that they haven’t moved is because the Fed hasn’t announced any bad news- just somewhat neutral news. As long as a definite position isn’t taken, I don’t think that we should anticipate too much movement.
Another piece of the puzzle related to productivity level- “U.S. output-per-hour worked, a standard measure of productivity, grew just 0.5% in 2013 and appeared to grow slowly again in the first quarter”. The bad thing about slow productivity is that it makes it harder to calculate the amount of slack in the economy level. Slack is a key part of measuring uncertainty, and without the ability to measure of uncertainty it is clearly more difficult to predict the right time to raise interest rates.
In my opinion, I don’t think there’s anything wrong with the projections that Janet Yellen has given. Many keep pressing her to give a concrete date of when to expect rates to rise, but at the end of the day there really are too many factors that control the outcome. Ms. Yellen is not clairvoyant, she’s really doing the best that she can as far as looking into the specific elements that may cause rates to change. We can see this through her decision to drop the unemployment rate target because she believed there were many other forces at hand. In sum, I believe that those doubting Ms. Yellen should sit back and realize that if she were to give a concrete date and then unforeseeable measures caused her to re-adjust her position, the public would be even more displeased. Naysayers need to realize that we have slowly been inching our way out of the recession, the future still looks promising.