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Fed Signals It Won't Tap Brakes Until Job Market Improves


Janet Yellen presided over her first meeting as Federal Reserve chair yesterday, followed by her first press conference. Although, the Fed tinkered with the wording of its end-of-meeting statement, she said Fed policy was basically unchanged. Financial markets thought otherwise and gave her the thumbs down.

To help us understand why, we turn now to David Wessel. He's with the Brookings Institution and a contributor to The Wall Street Journal. And David, start by telling us what exactly the Fed did yesterday.

DAVID WESSEL: It said it would continue to scale back its purchases of long-term bonds because the economy is gradually healing. It said that it still intends to keep short-term interest rates near zero - where they've been since 2008 - for a long while, provided the economy behaves as the Fed currently forecasts. A big if. And Ms. Yellen emphasized that once the Fed does start raising interest rates, it plans to do so very gradually and keep them lower than normal even after inflation and unemployment return to normal.

MONTAGNE: And why the negative reaction in the financial markets?

WESSEL: Financial markets are...

MONTAGNE: That's pretty straightforward.

WESSEL: To you.


WESSEL: Financial markets are fixated on what is going to trigger a Fed rate increase and when that's likely to happen. And they react - maybe overreact - to any hints the Fed gives. And some analysts say, saw signs in the new Fed forecast released yesterday, that some officials are preparing to raise rates earlier in 2015 than had previously anticipated. And Jenny Yellen reinforced that view by fumbling the answer to one question. But I actually don't think that was her intent.

MONTAGNE: To fumble the answer...


She didn't mean to provoke expectations that rates were coming earlier. Look, the Fed has been trying all sorts of ways to persuade people that it really isn't going to rush to raise rates. Earlier, it done that by saying, we're going to keep interest rates near zero, well past that unemployment close to six and a half percent. Well, unemployment is close to that, so they had to change their formula - their message - and they came up with one that's very vague. It discards any reference to a single number. It says they're going to look at a wide range of indicators, so the market is looking for little clues here. She said, explicitly, that the new words weren't meant to convey any change in the Fed thinking. She is trying to say the Fed is not going to tap the brakes until the job market gets a whole lot better and the Fed is confident that inflation has moved up towards its two percent target.

MONTAGNE: But David, isn't a falling unemployment rate a sign that the job market is getting better?

WESSEL: It certainly is. But as she pointed out, it's down, in part, because so many people have dropped out of the job market and they're not looking for work so they don't show up as unemployed in the official tally. So she said the Fed is looking at all sorts of other indicators that suggest the labor market is weak. For instance, she mentioned that an unusually large number of workers - five percent of the labor force - is working part-time but wants work full-time. And she dismissed all the speculation that's in the press and among some analysts that wages are starting to go up. That's another sign of a weak labor market.

MONTAGNE: So, overall, with her first press conference - her debut -what do you give her, a thumbs up or a thumbs down?

WESSEL: I give her a thumbs up. Except for that one stumble on the timing of rate increases, it did shake up the market, she did pretty well. She fielded questions with what seemed to me, composure and confidence. She appeared to be candid. She said at one point that the Fed had been too optimistic about the economy in January. Now she was a little wordy and that disappointed the press, 'cause she didn't have a lot of pithy soundbites and she answered fewer questions - 15 - than Ben Bernanke did at his last press conference - 21, but frankly, that might have been her intent.

MONTAGNE: David, always a pleasure.

WESSEL: You're welcome.

MONTAGNE: David Wessel is director of the Hutchins Center at the Brookings Institution. Transcript provided by NPR, Copyright NPR.

Renee Montagne, one of the best-known names in public radio, is a special correspondent and host for NPR News.