Janet Yellen and the Federal Reserve: What to watch for Wednesday

WASHINGTON -- Janet L. Yellen, who broke the Federal Reserve’s glass ceiling, marks two more milestones Wednesday, wrapping up her initial policymaking meeting as chairwoman then facing reporters’ questions for the first time since taking office last month.

The Fed chair’s quarterly news conferences have drawn great attention since her predecessor, Ben S. Bernanke, began holding them in 2011 to improve public understanding of the central bank’s actions.

Now Yellen takes over the tradition, which adds an additional challenge to the job as financial markets try to interpret every answer for signs of the Fed’s direction.

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Here’s five things to watch for Wednesday.

Will the taper continue?

Yellen and her colleagues on the policymaking Federal Open Market Committee are expected to continue to taper the central bank’s monthly bond-buying program despite some weakness in the economy this winter.

Recent reports, including surprisingly robust February job growth, indicate the recovery is continuing at least at the pace it was in December when the Fed announced it would gradually scale back its monthly $85 billion in bond purchases.

Fed officials cut the figure by $10 billion a month after its December and January meetings (there was no meeting last month). And they are expected to announce another reduction in their policy statement due out at 11 a.m. PDT.

That would bring the monthly purchases down to $55 billion and keep the Fed on pace to end the program later this year.

Yellen was a loyal lieutenant of Bernanke, serving as his vice chair from 2010 until succeeding him, so no major changes in policy are initially expected.

“I think they have signaled fairly clearly what their intents are and I have not seen any indication of expectation for change,” AT&T Inc. Chief Executive Randall Stephenson told reporters Tuesday when asked if he anticipated more tapering.

Revised forward guidance

One thing Yellen and the Fed could change is their so-called forward guidance on when the central bank could start to raise short-term interest rates.

The benchmark federal funds rate has been near zero since late 2008. The Fed has said it would keep it there at least as long as the unemployment rate was above 6.5%.

But the unemployment rate has been falling faster than anticipated -- and faster than job creation seems to indicate it should, economists said.

The rate dropped to 6.6% in January before ticking up 0.1% last month, and could soon go below 6.5%.

Recent formal policy statements have said Fed officials anticipate “it likely will be appropriate” to keep the interest rate near zero “well past the time that the unemployment rate declines below 6.5%.”

The Fed could go a step further Wednesday, removing the reference to the unemployment rate and adding some broader guidance tied to the overall state of the labor market. The Bank of England has taken such a step.

“This is probably a reasonable time to revamp the statement to take out that 6.5% threshold because it’s not really providing any great value,” William Dudley, president of the Federal Reserve Bank of New York, told the Wall Street Journal this month.

Blame it on the weather

Yellen has two degrees in economics, but none in meteorology. Still, expect her to be asked what effect the snow and bitter cold in much of the country this winter had on some weak economic reports when the news conference begins at 11:30 a.m. PDT.

In Senate testimony last month, she said “unseasonably cold weather” had played a role in softening some data and that Fed officials would watch the situation closely to make sure that was the case.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia, echoed that view last week. He said the weather-impacted data shouldn’t cause the central bank to stop reducing its bond-buying.

As winter closes, some recent economic reports have indicated the economic chill has thawed. The economy added 175,000 net new jobs in February, bouncing back from two sub-par months.

And this week the government reported that factory output surged last month, helping overall industry production to rebound from a weak January.

Fed officials will release their quarterly economic forecasts, which should reflect if they believe the recovery has slowed or was just stalled temporarily by Old Man Winter.

Will the hawks flap their wings more?

Yellen is known as a dove on inflation because she is willing to tolerate a higher level in order to bring down unemployment. Plosser is one of the inflation hawks on the Federal Open Market Committee, placing more importance on keeping inflation low.

Bernanke also was known as a dove, but managed to keep dissent from the hawks in formal Fed votes to a minimum. Will Yellen be able to do the same?

The task should be easy as long as the Fed continues to reduce its bond-buying, which the hawks have advocated, and inflation is running well below the Fed’s annual 2% target.

But she could have trouble when it comes to crafting forward guidance on interest rates, which the hawks would like to see go up sooner than Yellen and the doves are likely to want.

Still, Yellen has several allies on the committee and should be able to get her way with only a few dissents at most.

Does Yellen open up in front of the cameras?

Yellen has faced TV cameras and reporters before, but this is the first time as Fed chair.

Bernanke was cautious in his quarterly news conferences, careful not to freelance on Fed policy. It didn’t usually make for compelling viewing but normally kept financial markets calm.

Expect reporters to try to get Yellen to go off-script and talk about Washington gridlock, world crises and other issues. And given her historic role as the first woman Fed chair, expect some personal questions about what the past several weeks have been like for her.

How far will she go in talking about herself or issues outside the realm of the Fed? Expect Yellen to follow Bernanke’s lead and try to stick to the script as much as possible.

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