Vietnam Cuts Rate, Yellen Learns the Power of Her Words

Monetary Policy Week in Review – Mar 17-21, 2014

by Peter Nielsen, Central Bank News

Seven central banks maintained their policy rates last week while Vietnam cut its rate as Janet Yellen, the new chair of the U.S. Federal Reserve, learned how every single word she utters has the power to move markets via trigger-happy news media.

As her predecessor Ben Bernanke learned after chatting to CNBC’s Maria Bartiromo three months after taking over from Alan Greenspan in 2006, every single word from a Fed chair has to be scrutinized and weighed for its potential impact on jittery financial markets. There is no room for subtle points or thinking out loud.

Although Yellen on several occasions during her first press conference on Wednesday said the Fed’s new guidance did not “indicate any change in the Committee’s policy intentions,” this point went out the window when she tried to explain what the Fed meant by “a considerable period.”

In its new guidance, the Fed, like the Bank of England last month, ditched unemployment as a simplistic threshold for changing policy in favor of a broader range of indicators that can give policymakers a fuller understanding of the slack in the labor market and inflationary or deflationary pressures

In its statement, the Fed’s policy-making body, the Federal Open Market Committee (FOMC), said the fed funds rate will likely be maintained at the current level for “a considerable time after the asset purchase program ends” especially if inflation is below the Fed’s 2.0 percent goal

As any good journalist, a Reuters reporter quizzed Yellen on how long the gap could be between the ending of the Fed’s asset purchase program sometime in the fall of 2014 and a rate rise.

Yellen took the bait

Yellen Said:

“But, you know, (that) probably means something on the order of around six months or that type of thing”

It was a dream come true for journalists. The headline and the story was served on a silver platter. The message that the Fed was likely to raise rates in the first half of 2015 was instantaneously flashed to financial markets across the world

Yellen’s context for her statement and clarification that any decision to raise rates would depend on the condition of the labor market and inflation was lost in the shuffle as global stock and bond markets dropped in anticipation of a rate rise in April 2015, some three months earlier than expected

In the days following what will likely become known as Yellen’s rookie mistake, her Fed colleagues did their best to explain that financial markets overreacted to her statement and she was not signaling a more restrictive policy stance.

Yellen has not spoken in public since the press conference.

Through the first 12 weeks of this year , rates have been cut 14 times, or 13 percent of this year’s 108 monetary policy decisions by the 90 central banks followed by Central Bank News, steady from the previous week but down from 14 percent at the end of February

Rates have been raised 10 times, or 9.3 percent of this year’s policy decisions, down from 10 percent the previous week and 10 percent at the end of February.

LIST OF LAST WEEK’S CENTRAL BANK DECISIONS :

• Vietnam cuts rate 50 bps to boost growth as inflation falls
• Turkey holds, repeats tight stance until better CPI outlook
• Iceland holds rate, says inflation outlook has improved
• Fed trims QE to $55 bln, holds rates for considerable time
• SNB maintains FX, interest rates, cuts inflation f’cast
• Sri Lanka maintains rates, sees inflation mid-single digits
• Mexico holds rate, rise in January inflation was temporary
• Sri Lanka maintains rates, sees inflation mid-single digits
• Colombia holds rate, extends FX intervention program

TABLE WITH LAST WEEK’S MONETARY POLICY DECISIONS:

This week (Week 13) 16 central banks will be deciding on monetary policy, including Israel, Armenia, Morocco, Nigeria, Hungary, Albania, Georgia, Norway, Taiwan, the Philippines, Moldova, Fiji, South Africa, the Czech Republic, Romania and Trinidad and Tobago.

www.CentralBankNews.info