As the U.S. Federal Reserve’s chief communicator, Chair Janet Yellen is under building pressure among her colleagues and global investors to clarify where the world’s biggest central bank is heading and how it is making its decisions.
The calls have come from both her policy opponents like St. Louis Fed President James Bullard and more centrist sympathizers like Atlanta Fed President Dennis Lockhart, as well as market analysts and investors who say they have been confused about the Fed’s direction.
It is perhaps her biggest test yet as she tries to guide a committee currently divided between those who feel the U.S. economy has healed enough for a rate hike, and those who feel a weak global economy could undermine the country’s growth and recovery.
Aside from last week’s press conference, Yellen has been largely absent from the public stage in recent weeks — focusing attention on a Thursday speech that could give insight into her place in that debate.
In the interim, analysts and investors insist the Fed has let seeming contradictions take hold — saying that markets should not influence monetary policy, but then reacting to markets; declaring policy is data dependent and then saying that a 5.1 percent unemployment rate still needs to fall further.
“This will be a test and maybe the largest one she’s faced yet,” after an initial period of relative harmony at the U.S. central bank, said David Stockton, the Fed’s former research director.
The stakes are global. A mistimed move by the Fed could see the U.S. raising rates as the world economy slows, triggering a further global slowdown as investors readjust to the Fed’s move and perhaps pull capital from emerging markets.
While careful not to personally criticize Yellen, who in 18 months as chair has put a premium on consensus and soliciting a wide set of views about the economy, there appears broad agreement that the Fed in recent months has added to the market instability that last week prompted a delay to a rate hike.
“I don’t think we are stuck in an adverse loop with markets,” Lockhart said on Monday. But “uncertainty about the (Federal Open Market Committee’s) policy intentions probably added to the overall environment of uncertainty that precipitated the volatility in mid-August…I am in the camp that would like to see the committee continue to refine its communications approach, particularly in this period.”
SOME DATA IS MORE EQUAL THAN OTHERS
Though the Fed says it is data dependent, it is not clear that each member views the same data with the same priority, or puts the same weight on the Fed’s twin employment and inflation goals. That could be fixed, Lockhart said, if the central bank developed a consensus “reaction function” to outline the conditions or triggers for a rate hike.
Bullard went a step further in an unusual televised appeal Monday asking former U.S. Treasury Secretary Lawrence Summers and others to effectively stop making public arguments against a rate hike, and muddling the Fed’s discourse.
The confusion, coupled with Yellen’s cautious tone at a press conference last week, has left investors discounting a rate hike until next year – despite Fed forecasts that show 13 of the Fed’s 17 policymakers expect to raise rates this year.
Yellen, scheduled to speak on Thursday in Amherst, Massachusetts, may need to reclaim the message.
“I would think she will try to clarify things, one way or the other, because I cannot possibly think they are unaware of the problem that they have,” said Roberto Perli, a former Fed official who is now partner at Cornerstone Macro.
On Thursday, the Fed cited risks from China and elsewhere and downward pressure on U.S. inflation from a strong dollar and weak commodities as reasons to hold off raising rates for the first time in nearly a decade.
While the decision had near-unanimous backing, a handful of hawkish policymakers like Bullard did not have a formal vote on the FOMC, and comments over the weekend suggested a close call.
Underscoring the sometimes fractious structure of the U.S. central bank, seven of the 13 officials who recommend a tightening this year only want one rate hike, while six want two or more hikes, according to the forecasts.