Janet Yellen’s message to global markets

What the US Federal Reserve chief said on international spillovers


Fed chief Janet Yellen said there is little they can do about market volatility, except to communicate clearly. Photo: Bloomberg
Fed chief Janet Yellen said there is little they can do about market volatility, except to communicate clearly. Photo: Bloomberg

Mumbai: The US Federal Reserve’s overnight statement and subsequent press conference were being watched across world markets. The timing and pace of the Fed’s rate hike has, in some cases, become more important than monetary policy decisions taken in the home market.

Emerging markets have been particularly nervous, given the kind of volatility they saw during the infamous taper tantrum of 2013.

Fed chief Janet Yellen, however, said there is little they can do about market volatility, except to communicate clearly.

“We can only do what is in our power to attempt to minimize needless volatility that could have repercussions for other countries or financial stability more generally and that is to attempt to communicate as clearly as we can about our policy decisions, what they will depend on and what we are looking at...,” said Yellen, when asked about international spillovers at the post-meeting press conference.

The fear of volatility hitting fragile world markets once again is the reason behind a series of missives delivered to the Fed on being cautious on rates hikes and international spillovers.

Reserve Bank of India (RBI) governor Raghuram Rajan has been the most vocal on the need for developed market central banks to consider international spillovers in their monetary policy decisions. For almost one year, most of Rajan’s overseas speeches have been focused on this issue.

To be sure, Rajan isn’t arguing that the Fed shouldn’t raise rates, but is cautioning the Fed against ignoring the impact that an exit from unconventional monetary policies will have on the rest of the world.

“....while exiting from unconventional monetary policies, central banks would pay attention to conditions in emerging markets (in) deciding the timing of their moves, while keeping the overall direction of the moves tied to domestic conditions,” Rajan said in a speech at the Brookings Institute in the US in April 2014, while arguing for greater coordination on international monetary policy.

On Wednesday, Yellen responded to those concerns, saying they are mindful of international spillovers, but can do little to prevent volatility.

“With respect to international spillovers, this is something that we have been long attentive to. We have to put in place a policy that is appropriate to evolving conditions in the US economy, but we can’t promise that there will not be volatility when we make a decision to raise rates,” she said.

The International Monetary Fund (IMF) and the World Bank have now started to mirror concerns about the impact a Fed rate hike will have on the global economy and eventually on the US economy. In some of the most direct messages to the Fed, IMF recently suggested that it should wait till 2016 before raising rates.

“Raising rates too soon could trigger a greater-than-expected tightening of financial conditions or a bout of financial instability, causing the economy to stall,” IMF said on 4 June.

Yellen’s response to this was that timing doesn’t matter as much as the direction.

“I want to emphasize, and I think the IMF would agree with this, that the importance of the timing of a first decision to raise rates is something that should not be overblown whether it is September or December or March, what matters is the entire path of rates, and as I have said the committee anticipates economic conditions that would call for a gradual evolution of the Fed funds rate towards normalization,” said Yellen.

Her final message to the markets and those worried about market volatility was this: watch the data.

“We will be responding to incoming data. We have tried to make that clear,” said Yellen.

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