Issue of the week: How Yellen spooked the markets

At her first press conference, the new Federal Reserve chair made the mistake of indicating when the Fed would raise interest rates.

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.”

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