Yellen to meet the press

Lauren Schneiderman

Federal Reserve Chairwoman Janet Yellen is stepping into the spotlight Wednesday with her first press conference as the head of the central bank.

Yellen is continuing a tradition started by her predecessor, Ben Bernanke, and will be fielding questions from reporters at a time when even the tiniest crumb of news from the Fed can send financial markets soaring or reeling.

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Traders and analysts, searching for any clues of how Yellen plans to manage a massive drawdown of stimulus, will be glued to their television sets.

“It’s live TV, so you don’t get a second shot. If you blow the question, the markets go kablooey,” said David Wessel, head of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.

“It’s like watching some debut of a new actor in a Broadway show,” he continued. “Can this person do as good a job as the actor who she replaced?”

Yellen, the first female Fed chief in history, brings a similar style to Bernanke’s and has proven his equal at making carefully worded statements that carry big meaning.

But her Bernanke-esque approach to the job has only made the search for differences that much more intense among Fed-watchers.

Investors will be looking for hints that Yellen is more “dovish” than Bernanke and willing to keep interest rates lower longer in an effort to take a bigger chunk out of the unemployment rate.

Though the format is new, Bernanke’s time behind the podium has shown that any messaging missteps can carry big consequences.

In June, Bernanke laid out a road map for how the Fed could exit from its stimulus. Stocks tumbled immediately after his remarks, with Fed officials seeking to soften the message in the subsequent days.

“Those press conferences are obviously a difficult environment. When every word you’re saying is being hung on by global financial markets, there’s always the potential for some miscommunication,” said David Stockton, the Fed’s former chief economist.

“She’s probably not going to want to venture into territory that would raise those risks, and simply try to communicate a simple message.”

So far, Yellen’s public outings have been uneventful, and she has navigated several appearances before congressional panels without incident.

But Wednesday could be different, as the Fed is expected to adjust its framework for raising interest rates.

Since the end of 2012, the Fed has said it doesn’t anticipate raising rates until the unemployment rate falls below 6.5 percent. The jobless rate now stands at 6.7 percent, but Fed officials have indicated the economy is nowhere near ready for a rate hike.

The nation is still grappling with a high level of long-term unemployed, and a drop in labor participation has weighed on the economy while driving the jobless rate down further. With all that in mind, Yellen told lawmakers in February that the unemployment rate alone was not a “sufficient statistic for the state of the labor market.”

That means Yellen will probably have to explain why the Fed is dropping that threshold, and lay out a new road map for markets when it comes to raising rates.

“She has an opportunity, I think, to provide more texture and granularity in terms of the indicators she’ll be looking at,” said Stockton, now a senior fellow at the Peterson Institute for International Economics.

With the Fed moving the goal posts on unemployment, Yellen’s challenge will be striking a balance between an outlook that is useful to markets but not restrictive on the bank’s policy options.

“It turns out to be hard to deliver complicated messages to the public and the markets,” said Wessel. “They want to see an arrow pointing to some date on the calendar, and she’s not going to give them that.”

Markets will also be closely watching what Yellen has to say about the weather. She has previously said that the recent slowdown in economic data could be explained, in part, by the cold snap that gripped the nation, keeping job-hunters at home and freezing other economic activity.

The Fed is widely expected to stick with its plan of slowly winding down the size of its monthly bond purchases, as it looks to peel back the stimulus it has pumped into the economy since the financial crisis. The Fed announced in December that it was prepared to gradually erase its quantitative easing, and a run of disappointing data was not enough to deter bankers from that path in January.

Economic data has rebounded in recent weeks, and outside factors, like turmoil in Ukraine, do not appear to be stressing markets.

So the stage is set for the Fed to keep shrinking its stimulus.

The Fed has trimmed its bond purchases by $10 billion in each of the last two meetings, leaving the monthly purchases at $65 billion. The bank has said that if the economy continues to improve as expected, it could end the purchases by the fall.