Yellen confounds in first policy announcement

Did Janet Yellen bungle her first press conference? Or did the Federal Reserve's brand-new chair mean it when she appeared to speed up the timeline for a crucial hike in short term interest rates? The US stock markets plunged Wednesday when Yellen, detailing Fed policy after leading her first meeting of the Federal Open Market Committee, gave a seemingly casual estimate to a question about interest rates. About how long, a journalist asked, would pass between the end of the Fed's ongoing quantitative-easing stimulus program, and an increase in its base interest rate? "The language that we used in the (FOMC) statement is 'considerable period,'" she replied. "This is the kind of term that's hard to define. But, you know, (it) probably means something on the order of around six months, that type of thing," she said. It did not matter that she added that "it depends what conditions are like." Traders did the math from the expected stimulus windup late this year and saw a rate change as early as March-April 2015, three months or so earlier than prior predictions. Already lower, the S&P 500 share index immediately dropped 17 points, nearly 1.0 percent, before recovering  to finish the day down 0.6 percent. Short-term US dollar interest-rate futures and Treasury bond yields also spiked higher. It left markets wondering though if she was being precise, or blew a message on interest-rate expectations that the Fed was trying to refine and clarify. "That led to an immediate sell off of fixed-income," Michael James of Wedbush Securities told AFP. "The fixed income market started getting pretty ugly, just to reduce risk across the board." - Mixed message - Up until then, the message had been that the federal funds rate, held at 0-0.25 percent since December 2008, would not budge before mid-2015. But Yellen also said that quantitative easing would end "next fall", which put a roughly October end-point on the program, now down to $55 billion a month. "That was a rookie mistake," said ex-Fed staffer Stephen Olinger of the American Enterprise Institute. "She shouldn't have been that specific because honestly she doesn't know what 'considerable time' is going to mean." Having served as predecessor Ben Bernanke's deputy for three years, Yellen is no stranger to the sensitivity of any utterance by the Fed chair. Indeed, she appeared to wince when she spoke, suggesting she realized she went too far. The Fed in fact did shift its interest-rate forecast in a significant way. The central bank polls its governing board members and bank presidents on the outlook for rates for the years ahead, and tabulates them into a dot chart that depicts clearly where the median prediction lies. In Wednesday's forecast, the median rate estimated for the end of 2015 was 1.0 percent, compared with 0.75 percent in the December outlook. But it was her remarks that the markets reacted to. Some analysts said that she handled herself well and the traders overreacted. She "turned in a virtuoso performance," said Bob Eisenbeis, an economist at Cumberland Advisors. He called the "six months" reference a misstep, noting she hedged it by saying it depended on conditions. "But markets heard only 'six months.'" "Our sense is that the market reacted too literally to what Ms. Yellen said," said Patrick O'Hare at Briefing.com. "The Fed has tried to distance itself from date-based guidance. It is silly to think she is going to hold hard and true to a six-month timeline."