Mon, Mar 17, 2014 - Page 15 News List

New US Fed Chair Yellen expected to stick to taper path

‘UNDER THE GUN’:How well Yellen communicates an eventual interest rate rise will help determine the level of volatility of the reaction in world markets

AFP, WASHINGTON

New US Federal Reserve Chairwoman Janet Yellen is expected to stick to the game plan when she chairs her first monetary policy meeting this week, further cutting back economic stimulus.

Yet, six weeks after inheriting former Fed chairman Ben Bernanke’s mantle, she is also under the gun to make a pivot in the way the Fed has been signaling its intentions.

Handled well, that delicate shift in how the Fed foreshadows an eventual rate hike could assuage markets.

Communicated badly, it could result in volatile movements and leave the new Fed boss on the back foot.

WEATHER IMPACT

The first meeting under Yellen’s lead of the US Federal Open Market Committee (FOMC), tomorrow and Wednesday, is expected to conclude that unusually harsh winter storms were mainly behind the slowdown in economic activity in December last year to last month.

The Fed has cut the program by US$20 billion to US$65 billion a month since the beginning of the year, and another US$10 billion cut could be decided this week.

Yellen already showed her bias toward the weather explanation when she testified before the US Senate on Feb. 27.

Taking note of the poor data, she said she “wouldn’t want to jump to conclusions.”

However, she added: “It is clear that unseasonably cold weather has played some role.”

A week later, the US Fed Beige Book survey of regional economies, important content for the FOMC policy meeting, mentioned the weather 119 times in explaining sluggish activity in much of the country.

REBOUND

A modest rebound in retail sales data last month suggested that there is some pent-up demand, and analysts hope this month and next month will show a rebound in the economy.

“We expect catch-up in March, leading to good momentum heading in to the second quarter,” Jim O’Sullivan at High Frequency Economics said.

Yellen, who has always stayed behind the scenes during her three years as Bernanke’s deputy, will face the media on Wednesday when she announces the FOMC’s policy decision.

With the bond-buying taper expected to remain on track, the challenge will be to explain how the committee will adjust the communication of its expectations: essentially, how it signals to the market when it plans to begin raising its key interest rate, held at a rock-bottom zero to 0.25 percent since December 2008.

At the end of 2012, the FOMC set specific thresholds for when it could begin lifting the rate: 2 percent for inflation and a 6.5 percent unemployment rate.

Most policymakers did not think those levels would be breached until next year, and the current Fed outlook for a rate hike is later next year.

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