Yellen poised to place stamp on Fed policy

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Janet Yellen1

Reuters.

US Federal Reserve chief Janet Yellen.

Washington - US Federal Reserve chief Janet Yellen is poised Wednesday to place her stamp on US monetary policy, challenged to balance a recently sluggish economy against the drawdown of the Fed's stimulus.

Yellen, who took the reins of the US central bank on February 1 from Ben Bernanke, will face the media to explain the Fed's policy course at the close of her first meeting of the Federal Open Market Committee (FOMC) as Fed chair.

While she has promised continuity with Bernanke, whom she served for three years as vice chair, she takes control as the Fed tests whether the US economy is strong enough to stand on its own, without tens of billions of dollars' worth of easy money being pumped into it each month.

Under Bernanke's lead the FOMC decided in December to begin cutting back the $85 billion bond-buying program, meant to hold long-term interest rates down to stimulate investment and hiring.

The program stands at $65 billion now, and most analysts expect another $10 billion cut announced Wednesday at the end of the two-day FOMC meeting.

But Yellen will also have to explain why the economy can weather the steady cutback of the stimulus after a nearly three-month slowdown in growth.

And she is under the gun to make clear Fed expectations for raising its benchmark federal funds interest rate, which has sat at a rock-bottom 0-0.25 percent since late 2008.

FOMC communications of plans for that rate have become muddled by the sharp fall in the official unemployment rate, which at 6.7 percent last month is very close to the stated threshold of 6.5 percent for weighing a rate hike.

But the FOMC has also communicated clearly that it does not expect to increase the fed funds rate until late next year.

A third challenge is the crisis over the Ukraine, which could stir up troubles for the global economy and put pressure on the Fed to keep monetary policy loose.

“The fallout appears minimal so far, but geopolitical tensions are high,” said Jim O'Sullivan, chief US economist at High Frequency Economics.

“The crisis could spill over to the US economy through financial contagion and confidence effects.”

Most analysts expect the FOMC to play down the recent slowdown in economic activity - slower consumer spending, industrial output and construction activity - as the result of the series of severe winter storms that battered the eastern half of the United States between December and February.

Yellen showed her bias toward that explanation in late February, when she told a Senate panel that “it is clear that unseasonably cold weather has played some role.”

A week later, the Fed Beige Book survey of regional economies cited the weather 119 times in explaining sluggish activity.

But analysts are not certain that the weather was the only cause, and are looking to see whether the Fed might see the need to pause the stimulus taper.

Markets will focus on how Yellen reshapes its signals for an eventual fed funds rate change.

At the end of 2012 the FOMC said it would begin weighing a rate hike when the official jobless rate falls to 6.5 percent and inflation reaches 2.5 percent.

While subdued inflation remains far off that mark, the unemployment rate has fallen close to the threshold.

Like Bernanke, Yellen has made clear that she does not believe the official jobless rate reflects the weakness in the labour market , and said last month the economy still needs support to lower the huge numbers of part-time workers and long-term unemployed.

The FOMC on Wednesday is expected to substitute more qualitative guidance for the previous quantitative targets. - Sapa-AFP


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