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Wednesday, March 19, 2014

What does Yellen's "around six months" mean?

by Calculated Risk on 3/19/2014 04:40:00 PM

During the Q&A today, Fed Chair Janet Yellen said:

"[T]he language that we used in the statement is considerable period. So I, you know, this is the kind of term it’s hard to define. But, you know, probably means something on the order of around six months, that type of thing.”
She was referring to the sentence in the FOMC statement:
The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
emphasis added
This raises several questions:
1) When does six months end?
2) Is this data dependent?
3) Is this new news?

Here is a table of actual and projected FOMC tapering (Note: this is not preset, but it would take a substantial change in the forecast to deviate from this schedule):

MeetingTaper toEffective
12/18/13$75 billionJan-14
1/29/14$65 billionFeb-14
3/19/14$55 billionApr-14
4/30/14$45 billion1May-14
6/18/14$35 billion1Jul-14
7/30/14$25 billion1Aug-14
9/17/14$15 billion1Oct-14
10/29/14$5 billion1Nov-14
1Current Forecast

Based on this schedule, the FOMC will conclude tapering as of January 1, 2015. So six months would be around July 1, 2015.

And to question #2, of course this is data dependent - on both employment and inflation.

And on question #3, is this new news? 

FOMC TimingHere is the chart today from the FOMC projections showing when participants expect the first rate hike (this was mostly unchanged from the December meeting). Thirteen of sixteen participants expect a rate hike in 2015. So saying "around six months" or mid-year isn't much "new" news (maybe a few months earlier than some expect).

Maybe it surprise some participants, but Yellen's comment fit previously released projections, so it really shouldn't be too shocking.

My guess is, if the first rate hike happens in mid-year 2015, it will be perceived as good news.