Yellen's tightrope walk in first Q&A as Fed chair

Published on NewsOK Modified: March 19, 2014 at 11:05 pm •  Published: March 19, 2014
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WASHINGTON (AP) — At her first news conference as Federal Reserve chair, Janet Yellen had a message for the financial world: The U.S. economy may need several more years to fully heal from the Great Recession.

With investors around the world hanging on her words, she conveyed the calm voice of authority she's been known for in her decades as a policymaker, regulator and professor.

Yet, as with her predecessor, Ben Bernanke, in his news conferences, Yellen's performance wasn't quite stumble-free. Speaking of when the Fed might raise short-term interest rates from their record lows, she was surprisingly specific. Her remark appeared to muddy her overarching message that rates are bound by no single economic indicator or time frame.

The slip-up occurred as Yellen was discussing the Fed's benchmark short-term rate, which has remained at a record low near zero since 2008.

The short-term rate has remained a critical source of economic support as the Fed has recently begun paring its monthly purchases of Treasury and mortgage bonds. The bond purchases have been meant to stimulate the economy by keeping long-term loan rates down.

The monthly purchases, down to $55 billion from a peak of $85 billion, are on track to stop by year's end. The Fed's short-term rate could remain near zero for a "considerable time" after the bond buying ends, according to the statement the central bank issued when its meeting ended Wednesday.

At her news conference, Yellen was asked to define a "considerable time." Her reply: "It probably means something on the order of around six months or that type of thing."

Stocks immediately sank on her mention of "six months" — even though Yellen quickly stressed that a six-month time frame did not represent any commitment.

"We need to see where the labor market is, how close are we to our full-employment goal," she cautioned. "That will be a complicated assessment, not just based on a single statistic."

Still, her explicit mention of six months suggested that a rate hike could occur before the summer of 2015, shortly before some analysts had expected. A short-term rate increase would elevate borrowing costs and could hurt stock prices. The Dow Jones industrial average ended the day down more than 100 points.

"She got caught off guard," said Douglas Roberts, chief investment strategist at ChannelCapitalMarkets, even though Yellen explained that she was "pretty decisively on the dovish side" in Roberts' words — meaning she favors keeping rates low to boost the economy more than she worries about igniting inflation.

For his part, Bernanke committed a gaffe of his own last summer.

At his June news conference, Bernanke said he'd been "deputized" by his Fed colleagues to describe a possible path toward slowing the monthly bond purchases. Bernanke said the slowdown would likely start before year's end and be completed by mid-2014.

Investors responded in panic to the prospect that the Fed would soon reduce its support for the economy. The Dow Jones industrial average sank 560 points in two days.

On Wednesday, apart from her remark about six months, Yellen glided smoothly through her first Fed news conference. Sitting behind a desk, Yellen, 73, explained that the 4½-year-old economic recovery still needs a boost from unusually low rates.