Fed's 2014 Conundrum: How to Alert Markets Rates Were Going Up

In her first year as Federal Reserve chair, Janet Yellen presided over a policy panel divided over the issue of how much longer the central bank could afford to keep its benchmark interest rate at a record low, and how to prepare financial markets for the start of rate hikes.

According to transcripts of the Fed’s discussions released Friday, Yellen and the majority of the panel debated the reasons that inflation remained stubbornly below the Fed’s 2% target even as unemployment kept falling.

The transcripts showed Fed officials struggling to adopt a modest change in wording to their policy statement at the December 2014 meeting. They sought to alert financial markets — without causing alarm — that the Fed might start raising its key policy rate in 2015 after keeping that rate at a record low near zero since the depths of financial crisis in December 2008.

The committee ended up splitting the difference by saying that it planned to be “patient’’ with its start to rate hikes. But to guard against a market overreaction, the panel decided to emphasize that this change in wording was “consistent” with the Fed’s previous statements that said it planned to keep rates at their current low “for a considerable time.”

The committee approved this change on a 7-3 vote, a highly unusual split for such a relatively modest change in the policy statement.

One of the dissenters, Richard Fisher, then president of the Fed’s Dallas regional bank, argued in the meeting that he believed improvements in the economy’s performance since October had moved forward the timing of when the Fed would need to start raising interest rates. Richard Plosser, then head of the Philadelphia Fed and another dissenter, objected to using any wording that linked the first rate hike to a passage of time, given the improvements already being seen in the economy.

By contrast, Narayana Kocherlakota, then head of the Minneapolis Fed, said by signaling possible rate hikes, the central bank was putting at risk the credibility of its stated goal of achieving 2% inflation.

Fed Vice Chairman Stanley Fischer, in an effort to lighten the mood, quoted from Lewis Carroll’s “Through the Looking Glass,” where Humpty Dumpty says, “When I use a word, it means just what I choose it to mean — neither more nor less.”

Yellen, for her part, noted that while the panel had a “range of views” on how to reword the policy statement, she said she appreciated the panel’s willingness to find common ground so the Fed could “communicate our policy intentions to the public as clearly as possible.”

She told the panel that in the news conference that would follow the announcement she intended to tell reporters, if asked, that “patient” meant that the central bank would not start raising rates until after the next two meetings.

The panel ended up adopting the wording that Yellen had backed, a move supported by Jerome Powell, who was then in his third year on the central bank and would end up succeeding Yellen as Fed chairman in February 2018.

As 2015 unfolded with continued low inflation, the Fed ended up not hiking rates until December of that year, with the Fed waiting another full year before it boosted rates by another small quarter-point in December 2016.

The Fed with Yellen at the helm followed those moves with three rate hikes in 2017. The Powell-led Fed raised rates another four times in 2018 before reversing course as the U.S. and global economies slowed in 2019.

The Fed cut rates three times in 2019. That led President Donald Trump, who tapped Powell to succeed Yellen, to complain that the central bank had raised rates too much and hurt the economy and the stock market.

The Fed releases a policy statement immediately following its eight meetings each year and, under a process started by Powell, also holds a news conference after every meeting. Three weeks after the meetings, the Fed releases minutes of the closed-door meetings which summarize the discussions. The actual transcript of what is said at the meetings is not released until five years have passed.