New Fed Chair Showing More Flexibility on Interest Rates
WASHINGTON — In her first weeks as Federal Reserve chair, Janet Yellen has made one thing clear: The Fed will keep all options open in deciding when to raise interest rates from record lows. Gone are the benchmarks that her predecessor, Ben Bernanke, used to try to guide investors: That by a certain point in the future or when unemployment reached a specific rate, the Fed would consider slowing its stimulus for the economy.
In a speech this month, Yellen said the Fed “must respond to significant unexpected twists and turns the economy may take.” On Wednesday, when it ends a policy meeting, the Fed will likely repeat that theme and echo a point it made after Yellen’s first meeting as chair last month: That even after the job market strengthens and the Fed starts raising rates, it will
The big question is when the Fed might start raising its key short-term rate from zero, where it’s stood since late 2008. That rate has remained a source of economic support because it keeps many borrowing rates low.
likely keep rates unusually low to support a still-subpar economy.
Yellen’s message of flexibility may help convey the Fed’s willingness to respond to abrupt shifts in the economy. Yet it can also be tricky. It can leave investors uncertain and fearful of a sudden shift in the Fed’s approach to interest rates. Financial markets hate uncertainty.
The Fed will be meeting in a week when the government will issue a flurry of reports on the economy — from manufacturing growth and consumer spending to home prices, consumer confidence, economic expansion and job gains. Collectively, they will help sketch a more detailed portrait of the economy.
And they are among the many indicators Yellen has stressed the Fed must monitor to fully assess the economy’s health and decide when to start raising rates.
That message marks a shift from the approach Bernanke took over the past five years as the Fed struggled to strengthen the economy after the Great Recession. Under his leadership, the Fed sought to be as publicly specific as possible about its intentions. And it did so by focusing primarily on the unemployment rate. In December 2012, for example, the Fed said it intended to keep its benchmark short-term rate near zero at least as long as unemployment remained above 6.5 percent. The idea was to signal roughly how long the Fed was committed to keeping borrowing rates at record lows to spur spending and economic growth.