The Federal Reserve held interest rates near zero on Thursday, raising questions over how it will ever manage to lift them off the floor and how effectively it will communicate plans to do so.
Only just over half economists polled have predicted such an outcome, a rare occurrence, and a sign of just how hard it has become to read the Fed these days.
Prior to the rate decision, Fed Chair Janet Yellen had not spoken in almost two months. Two of her closest allies had spoken late last month but delivered seemingly contradictory messages just days apart.
After the decision, Yellen said while it was an “unfortunate state of affairs” that every comment by a Fed official is parsed for hints about the Fed’s next move, “uncertainty in financial markets” is natural when a policy shift is near, as it is today.
Policymakers do not, she said, try to make up their minds on a daily basis based on the economic release of the moment, but use their regular meetings to take stock of the accumulated information and make a decision from there.
“We do our darndest to pull together the best analysis we can,” Yellen told a news conference.
The issue appears to be how Yellen manages the rate setting body. Like her predecessor Ben Bernanke she listens to others before speaking at the open markets committee and she appears to value forming consensus, shown by the fact that there was just one dissent in Thursday’s vote.
The language used by the Fed is aimed at giving it a high degree of flexibility when it comes to rate decisions.
That may now be a weakness when it comes to communicating where the Fed is in situations in which it might need to pivot in response to developments such as the recent market turmoil in China and beyond, possibly leading to continued volatility in financial markets.
For months the Fed has said it will only raise rates once it is “reasonably confident” that inflation will rise back to its 2-percent target. At the same time, it has said it “expects” it will rise toward that rate, despite continued misses, and without spelling out what more information would be needed.
“I think the Fed has muffed the communication going into this meeting,” said Lou Brien, analyst for Chicago trading firm DRW Holdings. “They could have offered more clarity.”
Markets were pricing in a one-in-four chance of a 25 basis point rate rise ahead of Thursday’s meeting, according to the CME Fedwatch tool.
The mixed messages in recent months mark a departure from Yellen’s pledge in an April 2013 speech to end the days of “never explain, never excuse”, when she said the Fed would “reap the benefits of clearly explaining its actions to the public”.
Yellen earlier this year became a convert to so-called data-dependent policy-making. The idea was that the Fed would say what the economic data should look like before it tightens policy allowing the public to try to figure out if incoming data met that bar.
In August, the New York Fed president William Dudley suggested that turmoil in global financial markets meant the chances of a September rate hike were receding. Just days later Fed Vice President Stanley Fischer left the door to a rate rise open.
That made the Fed look like a “Tower of Babel,” said Wells Fargo economist John Silvia.
Still, not all investors were thrown by the Fed’s lack of clarity. In their view, Fed policy-setters simply cannot make the kind of guarantees on rates that they used during the depths of the recession.
And with data – and global financial turmoil – pushing the Fed is different directions, Yellen may have made the right choice in staying silent, rather than risk appearing to be overly swayed by one economic data or another.
“The best you can hope for is guidance around progress being made toward their objectives,” said Craig Bishop, lead strategist for the U.S. fixed income group at RBC Wealth Management, which has $275 billion under management.
(This story has been refiled to remove extraneous word “it” from first paragraph)