New US Federal Reserve Chief’s ‘Blunder’ Spooks Markets

Janet Yellen took the stage as the new chair of the Federal Reserve this week. How were her surprising interest rate comments received around the world?

The UK may have been preoccupied with the Budget Statement this week, but eyes around the world were largely focused on Janet Yellen’s first press conference as the new chair of the US Federal Reserve.

As the woman effectively holding the reins on the world’s largest economy, economists and investors alike were keen to hear how Ms Yellen would lay out the Fed’s expectations for recovery in the US.

The Fed surprised nobody when it announced plans to continue winding back its monetary easing programme by shaving another $10 billion off its asset purchases, but markets stood up and paid attention when Ms Yellen shed perhaps a little too much light on the issue of interest rates.

When asked when the Fed might consider raising the benchmark interest rate, Ms Yellen explained that the Open Market Committee will maintain current rates for “a considerable time” after it finally exits monetary easing. That’s due to happen in the autumn, so when she elaborated that “a considerable time” could be “around six months”, investors were surprised that interest rates could rise as early as next spring – long before anyone had anticipated.

Reports have already counted this as a blunder on Ms Yellen’s part, since the Fed has usually been vague enough in any forward guidance it offers to stop markets from panicking, as they often do when there is a strict deadline.

Globally, markets have done exactly that. Stocks fell on the FTSE 100, the Japanese Nikkei index, Hong Kong’s Hang Seng, and the US’ own Nasdaq, Dow and S&P. At the same time, the dollar rose against the yen as demand for the greenback rose.

But ultimately, the key message of the press conference was that the Fed is largely optimistic about the state of the US economy. It may have missed the targets set out in its forward guidance, but it did come close. Though some of the recent data has indicated that recovery is still somewhat shaky, it seems there is still plenty of hope on the horizon.