This may be a case of over-the-top tea-leaf reading.
So, by definition, it will be convoluted. But here goes. My interpretation of some comments made today byFederal Reserve Vice Chair Janet L. Yellen indicates the central bank will feel no rush to remove the famous “extended period” language from its post-meeting statements.
The reason for that, essentially, is that Yellen thinks the Fed’s conditionality around that phrase has been sufficient to allow market participants to change their views about when the central bank may finally come off its long-standing emergency easy policy, which features zero short-term interest rates. Said another way, the phrase “extended period” is flexible.
Since March 2009 the Fed has said after each rate-setting meeting of the Federal Open Market Committee that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Since November 2009, Yellen added, the Fed has talked more specifically about what some of those conditions are: low rates of resource use, subdued inflation and stable inflation expectations.
The reason this is important is because some Fed watchers would look for the central bank to remove the “extended period” phrasing as an early sign the economy is strong eneough to allow a tightening to a more normal but still easy monetary policy. Yellen’s comments indicate that’s not necessarily the case.
This is all still pretty academic, since the Fed is not going to begin to tighten policy any time soon, perhaps not until near the end of 2011. Maybe longer. The Fed’s still carrying out the extraordinary $600 billion of Treasury securities buying above and beyond zero-rate policies, just to show how far from tightening policy the central bank stands. There’s every reason to believe the Fed won’t stop this bond buying prematurely. It is scheduled to go through June.
Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, was the lone voting dissenter last year on the Federal Open Market Committee. He argued conditions had improved enough to at least remove the “extended period” language. This columnist agreed.
But Yellen effectively said today that the regular appearance of the “extended period” phrase didn’t stop analysts and market folks from shifting ideas about the timing Fed tightening to an earlier date when economic signs strengthened and pushing the presumed date further into the future when indicators weakened.
Overall, the U.S. economy’s growth path has strengthened in the past few months, though unemployment remains high. Who knows how long suddenly higher oil prices will stand and what will be their eventual macroeconomic impact.
Yellen heads a Fed committee on communicating with the public. Fed Chairman Ben Bernanke recently held a press briefing, which had to be viewed from the Fed’s view as a big success. The chairman handled questiosn well and defended the Fed’s extraordinary easing tactics.
Yellen’s comments today indicate that certain communications, if repeated for a long enough time, might lose some of their meaning.