Issue of the week: How Yellen spooked the markets

At least it wasn’t a total disaster, said Paul R. La Monica in CNN.com. New Federal Reserve Chair Janet Yellen held her first press conference last week, and “judging by how the market reacted,” you would have thought she “dropped an F-bomb or had a wardrobe malfunction.” But Yellen did make one big mistake: Responding to a question about when the Fed would start raising interest rates, she essentially set a date by indicating that hikes could come “as soon as six months” after the Fed finishes winding down its bond buying, expected later this year. “Giving the market a specific time frame for Fed actions is not wise,” and Yellen should know better, since it’s a trap her predecessor, Ben Bernanke, often fell into. Today’s investors treat everything the Fed says “as gospel” despite the central bank’s insistence that no policy moves are on a “preset course.” The markets, predictably, recovered after a brief setback. And while anxious investors deserve part of the blame, the incident “should serve as a reminder to Yellen” that “transparency is problematic when the Fed talks too much and confuses investors.”

Which is why it may be time to put opacity “back on the menu,” said Matthew C. Klein in BloombergView.com. The economy is “a complex system that no one fully understands.” Committing to specific numerical guidelines only limits “policymakers’ flexibility to react to unforeseen events.” And with Wall Street hanging on the Fed’s every word, a less transparent central bank might mean fewer trigger-happy traders and panic-ridden markets. In fact, “muddying the waters may be just what’s needed to promote a safer financial system.”

Give me a break, said Michael Grunwald in Time.com. How is “excessive specificity” a mistake? Fed-watchers jumped at Yellen’s “six month” timetable, but did anyone notice she qualified it with phrases like “hard to define,” “probably,” “something on the order of,” and “it depends”? “The overwhelming thrust of her remarks was that the Fed is basically staying the course,” yet “markets and market analysts reacted as if she had announced she was tapping the brakes.” Yes, Yellen’s rhetoric may have been “marginally more hawkish than expected,” but headline-hungry reporters and hair-trigger investors are missing the forest for the trees.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

But how can they not? asked Ronald Fink in Crain’s New York Business. “The markets make so much of the Fed’s words because the potential impact of monetary policy on growth is the only game in town.” And thanks to the gridlock on Capitol Hill, Congress isn’t likely to green-light spending increases anytime soon, no matter how much they might help kick-start the economy. Instead, “it falls entirely to the Fed to do the heavy lifting. So it’s no wonder the markets overreact to everything the central bank chair says that is even minimally unexpected.” Yes, Yellen misspoke—giving the markets a specific timetable is rarely a good idea. But the reaction says more about the rest of the government’s fecklessness than “her talents as the Fed’s mouthpiece.”