Fed Chief Yellen Testifies Without Market-Moving Mistake

The new head of the Federal Reserve made her debut this week in a marathon hearing before the House Financial Services Committee. Steve Inskeep talks to David Wessel, director of the Hutchins Center at the Brookings Institution about Janet Yellin's first days as chair of the Fed, and what message she sent to Congress in six hours of testimony.

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STEVE INSKEEP, HOST:

NPR's business news starts with the Fed debut.

(SOUNDBITE OF MUSIC)

INSKEEP: Janet Yellen, the new chair of the Federal Reserve, made her debut this week in a marathon hearing at the House Financial Services Committee - six hours. She was to testify today in the Senate, but that hearing has been postponed by bad weather.

To talk about how she did this week, and what her message was, we turn as we often do, to David Wessel. He's at the Brookings Institution, also a contributor to The Wall Street Journal.

David, good morning.

DAVID WESSEL: Good morning, Steve.

INSKEEP: So I'm thinking back to the last couple of Fed chairman. Alan Greenspan was famously opaque. Bender Bernanke famously tried to be more open and clear. How's Janet Yellen communicating?

WESSEL: Well, she certainly has at least as much stamina than either of those guys did. They never had to testify for six hours. We learned that she can do that without making a market-moving mistake, which is really a prerequisite for a successful Fed chair. And we learned, for now, that she was very interested in emphasizing continuity with her predecessor, Ben Bernanke. So she really didn't say anything that we haven't heard or expected before. But it's not surprising, she's been at the Fed for the last several years. She was at the table when they crafted their strategy over the last several months so it's not surprising that that's what she's sticking to.

INSKEEP: So what's that strategy?

WESSEL: Well, the Fed cut short-term interest rates to zero in 2008, of course, and it realized that wasn't enough to restore the economy to health. So it did two novel things, both of them aimed at reducing long-term interest rates, like those on mortgages. One, it used brute force to reduce long-term rates by buying more than $3 trillion worth of Treasury bonds and mortgages. And two, it tried something it calls forward guidance, which is basically persuading the bond market to keep long-term rates low by promising that the Fed is going to keep the short-term rates it controls low for a really, really long time.

INSKEEP: Well, that goes back to that question communication strategy - what you say and how you say it. So the idea is to just persuade people that the Fed will act in a certain way rather than actually acting that way.

WESSEL: That's exactly right. And that's what they're trying to do because they can't push interest rates lower than zero, where they've been for some while. It's this approach is one that the Bank of England and the European Central Bank have embraced for the same reasons. Now for a while - for quite a while - the Fed had a hard time convincing the markets that it meant what it said. The markets kept anticipating, you know, you say you're not going to raise interest rates but you really are going to raise them sooner than you say. That was a particular problem at the middle of last year, but the Fed's been honing its message, and right now the markets seem to believe both what Ben Bernanke and Janet Yellen have been telling them.

We are going to keep short-term rates at zero until the job market gets a whole lot stronger as long as there's no signs of inflation.

INSKEEP: Until the job market gets a whole lot stronger - a whole lot. Is that one of those horrible economic terms, David?

WESSEL: It's close, close, actually.

(LAUGHTER)

INSKEEP: Oh, really? OK. Go on.

WESSEL: This is how the Fed has put it: we're going to keep interest rates near zero, quote "well past the time that the unemployment rate declines below six and a half percent."

INSKEEP: OK. That's pretty precise.

WESSEL: Now when they said that, unemployment was well over seven percent. But now the unemployment rate is down to 6.6 percent, so we're getting close to that threshold. Now the public forecasts of Fed policymakers - they tell us every quarter what they expect - indicate that most of them don't expect to raise interest rates until well into 2015. And Janet Yellen in her testimony said the same thing. She says the Fed is looking at a broad range of data about the job market, now not just the unemployment rate, but the number of people who are forced to work part-time, the number of people who aren't even looking for work at all.

She did promise to be , as she put it, as systematic and predictable as we can possibly be, but all the problem is that all of her promises depend on the economy unfolding pretty much as the Fed forecast.

And the Fed's forecast record is, to be honest, pretty mixed.

INSKEEP: David, thanks as always.

WESSEL: You're welcome.

INSKEEP: That's David Wessell.

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