Last week the Federal Reserve Bank Federal Open Market Committee (FOMC) held its first meeting under the chairmanship of Janet Yellen. The financial press had been abuzz about this event for days in advance. The meeting was significant because Yellen is the first female Fed chair in history. Additionally she followed up the meeting with her first news conference as Fed chair. By all accounts, it went pretty well.
There had been speculation as to what the FOMC would do relative to continuing to reduce the amount of securities purchased monthly on the most recent quantitative easing (QE) program initiated last year. There was concern about what economic indicators Yellen might favor to determine appropriate reduction amounts. Now we know the answers to these questions and concerns. Yes, the Fed will continue to reduce the amount of securities by $10 billion per month, as long as inflation remains under the target of 2 percent. Previously the target had been unemployment at 6.5 percent or less, and inflation under 2.5 percent. After the announcement of the continued reduction, which followed the meeting, Yellen clarified that unemployment was now at 6.7 percent; while the Fed will continue to watch that rate closely, it appears that this criterion would be met, so it does not need to continue to be a target.
Yellen also, importantly, stated that interest rates would remain low “for a considerable time” after the QE securities purchasing program ends. When pressed how long a “considerable time” was, she said around six months. Don’t look for her to be that specific again, as the Dow Jones industrial average dropped 160 points on that news. It did recover somewhat to be down only 114 for the day. The next day it was up 106 points, essentially back to where it started. While Yellen’s candor was somewhat refreshing following 20 years of Greenspan and Bernanke, expect her to be more cautious in future public speeches.
When asked how her life has changed since assuming the chairmanship, she responded, “I feel I’m very lucky that I’ve had a lot of Fed experience to draw on as I approach this role, because it’s complicated. And now, in many ways, I feel that the buck stops with me in terms of management of the FOMC and responsibility to assure that the Federal Reserve makes progress on its goals.” She continued: “In terms of the conduct of business, it’s pretty much the same as usual. I’m not envisioning, nor have there been so far, any radical changes in how the Federal Reserve does its business, and that includes operating the Fed’s policy-setting committee.”
On the subject of the economy, she noted: “Unusually harsh weather in January and February has made assessing the underlying strength of the economy especially challenging.” Regarding unemployment, she said: “The share of long-term unemployment has been immensely high and has been very stubborn in bringing down. That’s something I watch closely.”
When asked how she felt about the path set by former chair Ben Bernanke, she answered: “I think we are committed to exactly the same set of goals. I think he had a very good agenda, and it’s one I shared.”
Bankers, particularly community bankers who live off of interest-rate spread, are not likely to be thrilled with the continued program of keeping short-term interest rates at a very low level. The interest-rate levels for the past few years have taken a toll on community bank profits. Interest rates paid on deposits cannot go down any further, yet competition for good loans has continued to keep loan rates at historically low levels. This continued squeezing of the interest-rate spread apparently will remain a problem for bankers for some time.
Investors, however, seem to be comfortable with a continuing low-interest-rate environment. Regardless, it was an historic day that went relatively unnoticed.
S. Joe DeHaven, 03/26/14