LAMBRO: Yellen’s message about Federal Reserve’s plans unsettle market

The Fed’s exaggerated forecasts did not address needed job growth

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Federal Reserve Chairman Janet Yellen briefed the country Wednesday on the Federal Reserve’s plans for the economy’s problem-plagued recovery, sending Wall Street into a swoon.

It was her first news conference as the new head of the nation’s central bank, and though she was cautious in her remarks, she suggested that economic data has improved more than many people, and other economists, think.

However, it was the Fed’s plans to start raising interest rates earlier than expected that came as an ice cold shower for the still-sluggish economy and for the stock market.

Ms. Yellen’s remarks, following a report on the Fed’s two-day meeting, sent the Dow Jones industrial average down by 114 points.

The Fed, she said, will continue withdrawing from its bond-buying stimulus, which has kept the anemic Obama economy on life support — though with little to show for it in terms of jobs and economic growth.

Choosing her words carefully, she said the Fed would begin raising its interest rates, though perhaps not until 2015, depending on the economy’s health.

The Fed has kept its interest rates at zero since 2008, but Ms. Yellen said the economy has improved enough for the Fed to begin preparations to slowly raise its rates, which affect a broad swath of business and consumer loans for home mortgages and auto purchases.

The timing of the first hike could be “something on the order of around six months” after the Fed stops pumping money into the economy in its bond-buying program near the end of this year.

In an effort to reassure nervous investors, she said the higher rates would be kept beneath historical levels over the long run — but that was cold comfort in a high-volatility economy and a stubbornly tough business climate.

“Monetary policy will be geared to evolving conditions in the economy,” she said. “And the public does need to understand that as those views evolve, the committee’s views on policy will likely evolve with them.”

Still, the expectation of rising interest rates that will raise business costs was a grim prospect for employers who are still struggling in an uncertain economic environment.

The idea that interest rates would rise in the 2015-16 presidential election cycle was not a happy omen for the Democrats, either, who are already battling political and economic headwinds in this year’s midterm elections.

A survey of Fed officials showed that interest rates may rise to 1 percent by the end of next year, and to 2 percent or higher in 2016.

Ms. Yellen acknowledged the economy still faced a number of challenges on job creation, long-term unemployment and a shrinking labor force, but she insisted that there have been improvements in the economic numbers. Really?

Fed economists have slightly lowered their forecasts for economic growth to between 2.8 percent and 3 percent this year — forecasts that have often been far too optimistic in previous years.

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