Fed officials say markets overreacted to Yellen rate-hike comments

Janet Yellen News Conference Following Federal Open Market Committee Meeting
Federal Reserve Chairwoman Janet Yellen speaks during a news conference in Washington.
(Andrew Harrer, Bloomberg)

WASHINGTON -- Top Federal Reserve officials said financial markets overreacted to Chairwoman Janet Yellen’s comments last week indicating the central bank could start raising interest rates early next year.

In speeches and interviews, the officials stressed that Fed policy on its near zero short-term interest rates hadn’t changed and that rates would remain low for a long period of time.

“I don’t think the Fed changed its position,” Charles Plosser, president of the Federal Reserve Bank of Philadelphia, told CNBC-TV Tuesday.

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“In fact, it tried to say very explicitly in its statement we believe forward guidance or the expectations have not changed as far as we’re concerned,” he said. “So it’s a little bit puzzling the market would react the way it did.”

Plosser’s comments were echoed by John Williams, president of the Federal Reserve Bank of San Francisco.

“In the big picture, the policy hasn’t changed,” Williams told the Washington Post in an interview published Monday.

Plosser and Williams come from different ends of the spectrum on the policymaking Federal Open Market Committee, but were united in their defense of Yellen.


Plosser is an inflation hawk because he’s highly concerned about the effect of Fed policies on prices. Williams, like Yellen, is known as an inflation dove because they are seen as more willing to tolerate higher inflation in order to reduce unemployment.

In her first news conference since taking over leadership of the Fed, Yellen rattled markets Wednesday in talking about when the Fed might start raising interest rates.

After a two-day meeting last week, the committee said in its policy statement that it would continue reducing its monthly bond-buying stimulus program and intended to keep interest rates low for “a considerable time” after the program ends.

At its current pace of reductions, the bond buying would end this fall.

Asked to define a considerable time, Yellen said it could be about six months. That would mean the Fed could start raising interest rates in the first half of next year.

The comment immediately caused the Dow Jones industrial average to drop about 170 points as investors indicated that was earlier than they were expecting.

Plosser said six months wasn’t “a wildly unexpected time frame” based on market surveys and that investors should look to Yellen’s other comments that a decision on raising interest rates would be based on the outlook for inflation and the labor market.

James Bullard, president of the Federal Reserve Bank of St. Louis, made similar comments last week.


Williams said he didn’t expect the Fed would start raising interest rates until the second half of next year, and that the hikes would be “relatively gradual.”

Plosser would not call Yellen’s six-months comment a mistake.  But he said it would be better for Fed officials to talk about interest rate increases as tied to economic conditions instead of specific time frames.