Is Janet Yellen really a hawk?
March 19, 2014
Many should be able to relate to Janet Yellen's plight: You are new on the job, trying to ease into things and not make waves, and yet, before you know it, you find yourself in the middle of controversy.
At the conclusion of today's Federal Open Market Committee (FOMC) meeting, Yellen's first as the new Federal Reserve chair, the Fed announced it was continuing with the pace of tapering its quantitative easing asset purchases. That pace had been set in the prior two meetings under the guidance of then-chair Ben Bernanke.
In short, it seemed like business as usual, and yet the stock market tanked within minutes of the FOMC announcement.
The subtext for the market angst seemed to be a concern that the FOMC is becoming too hawkish under Yellen. Ultimately though, the announcement should have little lasting impact on deposit products such as savings accounts.
Hawks and doves
What does "hawkish" mean in this context? In Wall Street parlance, hawkish equates to a Fed that is more concerned about containing inflation than it is about promoting growth. This would mean more restrictive, less stimulative monetary policies.
In the aftermath of the Great Recession, the FOMC has been extremely dovish, undertaking extraordinary stimulative measures such as lowering short-term interest rates to nearly zero, and embarking on a program of asset purchases to drive long-term rates down. Even when the Fed announced in December that it was going to start tapering back those asset purchases, it was only in baby steps. Monthly asset purchases, which had been running at a pace of $85 billion a month, were cut back by $10 billion a month in December, and then again by another $10 billion in January.
The Yellen-led FOMC continued those baby steps today, cutting monthly asset purchases by another $10 billion. In short, the pace of tapering continues as it did under Bernanke, and yet the market reaction was decidedly negative. The Dow plunged by about 200 points before recovering somewhat, while bond yields spiked upward by 9 basis points.
Stock and bond investors have a vested interest in the Fed keeping asset purchases up, which may explain their reaction. However, by continuing to make any asset purchases at all, the Fed is still following an extraordinarily stimulative policy.
Impact on rates
Besides the continued tapering, some commentators took exception to the removal of a commitment that had appeared in prior FOMC statements that indicated that the Fed would keep short rates near zero well beyond the point when unemployment dropped below the 6.5 percent threshold. However, the new Fed statement links keeping those rates near zero to a goal of "maximum employment," which could be interpreted as an even more ambitious stimulative goal than 6.5 percent unemployment.
The bottom line is that the market reaction seems like much ado about nothing. It might be enough to temporarily push mortgage rates higher, but yet again, it is almost certainly not enough to budge savings account rates.