Stage set for Yellen to cut through rate-hike noise

After putting a December interest rate rise back on the agenda, Janet Yellen may now need to reinforce that message in coming weeks by “crowding out” dissenting voices in the Federal Reserve and navigating through possibly contradictory economic data.

Markets rolled back bets that rates would remain pegged near zero until next year after the Fed’s statement ending a two-day policy meeting made a specific reference to the next Dec. 15-16 session as an opportunity to consider a rate rise.

Yellen has long represented the view that a rate lift-off from near zero this year was the Fed’s base scenario, but that message has been drowned out by some dissenting voices and mixed signals from a central bank that says it is “data dependent.”

Analysts and former Fed officials say the Fed chief should use the bully pulpit, probably by early December, to either reaffirm that the central bank is on course to lift rates next month, or to definitively back down.

Failure to do so could set the stage for potential confusion, with markets possibly overshooting and sending borrowing costs sharply higher, tripping up the economic recovery.

“She really absolutely has to twist arms and get as unanimous of a decision as possible,” said Dan North, chief economist at Euler Hermes. “Otherwise there you are again with confusion and lack of clarity.”

Traders now give a 47 percent chance the Fed will raise rates for the first time in nearly a decade in December, up from 34 percent before Wednesday’s statement.

Yellen now will have more time to watch inflation and jobs data roll in through November, starting with third-quarter economic growth on Thursday and a key measure of U.S. wages and salaries on Friday.

But with two Fed governors recently opposing the house view and urging patience on rates, and skepticism having grown among investors, Yellen may need to abandon her quest for consensus and more forcefully set the course for action.

“My opinion is she should be more active, which would be a good thing mainly to reduce or even eliminate this cacophony problem,” said former Fed vice chairman Alan Blinder.

“The benefit is in reducing the shock and surprise in the market if and when you do raise interest rates in December, and they don’t want a big surprise.”

While the scars of the 2007-2009 recession are healing, world economic growth is slowing and the Fed’s peers in Europe, Japan and China remain in an easing mode. A U.S. rate rise would ripple through world financial markets, hit foreign currencies, and suck funds from emerging markets in particular.

Despite the Fed having repeatedly telegraphed a move this year, many investors believe that policymakers are trigger shy in the face of virtual absence of inflation and tepid economic growth of less than 2 percent in the latest quarter.

Fed governors Daniel Tarullo and Lael Brainard, as well as Chicago Fed President Charles Evans, have supported the idea of standing pat. They made the comments shortly after Yellen on Sept. 24 reiterated that a rate rise was still in the cards for this year.

All three vote on policy this year and another power broker, William Dudley of the New York Fed, has said in the past that the rate hike, whenever it comes, will not come as a surprise.


Yellen’s opportunity to prime markets may be a double-header public appearance in which she addresses the Economic Club of Washington on Dec. 2 and then testifies before a congressional committee on Dec. 3.

By then the Fed will have several price measures for October, as well as manufacturing, trade, and retail sales data. Yellen will also have the October jobs report in hand, but the November data will come on Dec. 4 as the last labor-market snapshot before the mid-December policy decision.

Many economists still believe the Fed will wait with its first move until 2016, citing soft jobs growth and little evidence that inflation, held down by a strong dollar and cheap oil, can rise to the Fed’s 2 percent target.

“Either the data will pull up probabilities of a rate hike, or the Fed will have to signal it’s coming,” said Aneta Markowska, chief U.S. economist at Societe Generale. She expects the Fed to stand pat in December but said Wednesday’s statement was a “subtle attempt to gently nudge the market” towards a rise.

Yellen, an adept listener and respected leader, may need to impose her will not only on markets but on a central bank that cherishes its public transparency and consensus-building, and that is careful not to prejudge decisions before its policy committee meets.

She wouldn’t “clamp down” on her outspoken colleagues but rather “crowd them out” with a definitive speech in late November or early December, said Blinder, a friend of Yellen’s.

“If she has a firm view of what’s to be done she’s going to push that view very hard, and almost certainly prevail.”

Source: Reuters

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