Yellen Expected to Adjust Forward Guidance

by on March 19, 2014 7:07 am BST

The Federal Reserve is expected to continue the tapering of their asset purchasing program by $10 billion to $55 billion per month at today’s FOMC minutes later this afternoon. This marks the first minutes meeting and press conference for new chair Janet Yellen, and market participants are looking for tweaks in the form of interest rate policy.

Equity markets have priced in the taper in confidence that the economy is growing and that interest rates will remain low for the foreseeable future. Nevertheless, it is uncertain what the Fed will do about policy going forward in regards of borrowing costs. The unemployment target of 6.5 percent had been tethered to a rate increase, but, with only .2 percent to go, Yellen will likely switch to some sort of qualitative stance which would allow lower rates indefinitely. A qualitative caveat would help prevent a spike in short-term rates on the assumption that a rate hike would be instantaneous once 6.5 percent unemployment is reached.

Officials do not believe the struggling economy could handle an increase in rates, and the quality of the unemployment numbers have always been a key concern. Unfortunately, low interest rates over an extended period of time has helped cause financial calamities. “I’m sure this committee will be interested in doing its best to communicate about what we foresee for policy,” said the Richmond Fed President Jeffrey Lacker.

It is unlikely, but the Federal Reserve should take the interest rate topic in stride and communicate to the markets much like it did with the taper. Initially, the markets could throw a wrench in the gears. Yet, getting the market use to the idea that small rate increases over the course of a particular time frame would be prudent.