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If central bank governors speak in generalities, it is not necessarily because they want to be evasive, its just that they dont know all the answers either. If a Raghuram Rajan, or a Duvvuri Subbarao before him, knew precisely at what point inflation would turn, or even what made it turn, they would have no hesitation in telling the market just when they would stop hiking rates. Which is why, new Fed chairperson Janet Yellen has probably learnt the virtues of being vaguerecall the famous Alan Greenspan quote if I seem unduly clear to you, you must have misunderstood what I said.
The Feds written statement on March 18 was along expected lines, and spoke of continuing with the policy of reducing monthly bond purchases by another $10 billion, of keeping monetary policy accommodativethat is, keeping the Fed funds rate at the current 0-0.25% rangeas long as the objectives of maximum employment and a 2% inflation were not achieved. Given the current US unemployment rate is pretty near the 6.5% target the Fed used to speak ofthe unemployment number is artificial since a large number of people are simply not re-entering the workforcenot surprisingly, Yellens first FOMC statement dropped the 6.5% number in favour of a more vague maximum employment. Yet, in the Q&A session, Yellen goofed up by being very specific and said the Fed would start hiking interest rates six months after it wound down its bond-purchase programmethat means by April 2015. While markets panicked immediately, it was always known the Fed was going to raise rates, but this is to be done graduallythe markets, however, focussed on just the 6-month number. While the median FOMC vote was for a 1% Fed funds rate in 2015 in the March meeting, it was 0.75% in the previous meeting. But hiking beyond that was something the Fed clearly said would take more timein the March meeting, the median FOMC vote for raising rates to 4%, the long-run average, is not for at least till the end of 2016.
While markets will settle down soon, and Yellen will take lessons in being Greenspanesque, the point is that US rates are only going up, the timing will remain a matter of conjecture. The Fed, after all, needs to bring its balance sheet back to earlier levelsit rose from $1 trillion before the crisis to $4 trillion right now. In which case, if the