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Yellen off-the-cuff remark a policy tell

Friday, March 21 11:52:04

When Janet Yellen said on Wednesday that the Federal Reserve may only wait six months after ending its bond buying to raise interest rates, it was an unscripted moment that many called a rookie mistake.

But even so, it could very well provide a clearer window into the U.S. central bank's thinking.

That certainly was how markets took it, immediately swooning as traders priced in a quicker start to rates hikes than they had earlier anticipated.

And increasingly, that is how some analysts view it as well.

"I think it was an expression of an honest view ... but maybe not as tactful as it should have been," said Millan Mulraine, an analyst at TD Securities.

"It is quite conceivable that she was correctly communicating to the markets the sense of the (Fed) board itself," he said. "I think they would have discussed what this means."

Transparency is a double-edged sword for central bankers, but Yellen, who took the helm at the Fed on Feb. 1, has argued hard for more of it.

As Fed vice chair last April, she said that as time for raising rates drew near, "it will be increasingly important for the committee to clearly communicate about how the federal funds rate target will be adjusted."

But saying too much can be perilous, as her predecessor Ben Bernanke found just months into his first term as chairman.

Thinking his remarks were off the record at a private Washington function, he told a news anchor that markets were wrong to think the Fed was done raising rates. When his comments were reported two days later, bond and stock markets fell and the dollar jumped.

Yellen's seeming slip at her first news conference as Fed chair elicited a similar reaction.

The S and P 500 index fell about 0.9 percent within 10 minutes, bonds sold off and the dollar shot higher when Yellen defined what the Fed meant by saying rates would stay low for a "considerable time" after the central bank's asset purchases ended.

While many viewed it as a mistake, JPMorgan economist Michael Feroli said it was equally plausible she was "trying to faithfully discharge her duties as chair."

"If the sense at the meeting was considerable time equals six months, then she felt compelled to relay that," he said.

Indeed, Yellen's goal may have been to augment what Bernanke once called "policymaking by thesaurus", or the penchant of central bankers to choose among particular phrases to sway market expectations.

The new entry for "considerable" time might read, as Yellen characterized it: "around six months or that type of thing ... it depends."

Then-Fed Chairman Alan Greenspan had flexibility in mind when he inserted the phrase "considerable period" into the central bank's lexicon in April 2003.

He wanted to assure financial markets that rates would stay low for longer than the single meeting or two that investors were then anticipating, but he wanted to do so without boxing the Fed in too tightly.

The idea was far from a shoo-in: a transcript from the Fed's policy-setting meeting shows nearly half of those at the table were uncomfortable with the term. But then-Board Governor Bernanke fought for its inclusion, and his advice won the day.

Policymakers never defined what they meant by the phrase.

But after the Fed dropped the term in January 2004, the meaning became clearer: less than six months later, the central bank embarked on a series of 17 consecutive rate increases. (Reuters)