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Yellen's big mistake

March 20, 2014: 1:41 PM ET
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Janet Yellen needs to learn what Ben Bernanke never did. The Fed can't mention the calendar when discussing policy moves.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Janet Yellen's first press conference as Federal Reserve chair was hardly a resounding success. But it wasn't an #epicfail either.

Judging by how the market reacted, you would have thought Yellen had forgotten the words to the national anthem on live TV , dropped an F-bomb, had a wardrobe malfunction or something.

But it really wasn't that bad. (Although I found it distracting when Yellen would take her glasses off only to put them back on again.)

Yellen made just one mistake as far as I'm concerned. It was a big one though. You know how they say you're not supposed to discuss religion, politics and sex in polite company? Central bankers need to add the calendar to that list.

When Yellen responded to a question about when the Fed might raise interest rates, she suggested that it could be as soon as six months after the tapering is over.

Related: Fed moves economic goalposts

Given that the Fed is likely to keep cutting its bond purchases by $10 billion a month at its next few meetings, that implies quantitative easing ends in the fall. Probably after the late October meeting.

Add six months to that, and you have a possible rate hike in the spring of 2015.

Many investors had been expecting rate hikes later in 2015, or perhaps not until 2016 -- despite what all the dot-plots that Yellen droned on about Wednesday might suggest. Traders did not like that.

And that's why stocks suddenly went down faster than a certain boxer did against George Foreman back in 1973.

Yellen made the same blunder that her predecessor Ben Bernanke often did. Giving the market a specific timeframe for Fed actions is not wise. Investors treat it as gospel, no matter how many times the Fed insists that no policy moves are on a "preset course."

The frustrating thing is that this could have easily been avoided. In the Fed's statement, it simply said that rates would remain near zero for a "considerable time" after the end of the asset purchases.

Yellen shouldn't have deviated from that. She should have said that this is a purposely vague and open-ended phrase.

Luckily, stocks have bounced back a bit on Thursday. Investors don't seem to be too nervous about the possibility of a rate hike coming a little sooner than expected.

Related: Yee-haw! The mechanical bull market

Still, this should serve as a reminder to Yellen and all other Fed members that this new era of central bank glasnost is not always a good thing. Transparency is problematic when the Fed talks too much and confuses investors.

Yellen needs to learn that mentioning dates needs to be verboten, much like bringing up that military conflict from the 1940s when a bunch of people of Teutonic descent are guests at your hotel.

Sure, investors deserve a huge chunk of blame for acting the way they do. But Yellen should be savvy enough to know how her words could be interpreted by fickle traders.

Sadly, I don't expect Wall Street to change. That's why the onus is on Yellen to watch what she says.

Of course, it's silly to expect that Yellen and the Fed are locking themselves into certain moves right now. So much can change with the economy.

If the job market continues to stall, and it's not just due to the weather, the Fed could hit the pause button on tapering.

Related: Recovery on track, but still slow and steady

Conversely, if the economy picks up more steam than expected and inflation rears its ugly head, the Fed may be forced to taper in bigger increments than $10 billion a month ... and maybe even raise rates sooner than the spring of 2015.

But if the Fed feels it can actually unwind QE and raise rates to normal levels more quickly, that's probably a sign that the economy is in better shape. And that's good news, not bad. But that's a rant for another day.

Sure, the market hates uncertainty. That would be a worn-out and tired cliche if it weren't so true. But sometimes, traders have to accept that economic data are a bit of a crapshoot. It is not easy to predict and forecast. The best economists are often very, very wrong.

That's why it is so colossally tone deaf of Yellen (and Bernanke before her) to EVER spoon-feed the market a target date for Fed actions. The Fed can't act based on what the calendar says. It can only act based on what the data are.

Janet Yellen, like everyone else, can safely say that April will follow March. But can she tell us what the unemployment rate will be next month? How many jobs will be added? What GDP growth will be in the first quarter? How much consumer prices will go up or down?

No, no, no and no. So do us a favor, Madame Fed chair. Learn from your rookie error -- and don't repeat it again and again like Bernanke did.

Never answer a question about when the Fed might do something by mentioning a specific number of months ... or even a year.

Get it? Got it? Good.

Reader Comment of the Week! The only individual that the market is arguably more obsessed with than Janet Yellen is a certain "world leader pretend" (what's up with all the old school R.E.M. references lately, La Monica?) in Russia.

One of my top followers compared Putin unfavorably to another mercurial personality -- the late owner of the NFL's Raiders franchise.

Ha. That is pretty funny. And when I followed up with Adam about whether that meant a former #1 draft pick turned bust from the Raiders might show up in Ukraine, Adam quickly fired back with another gem.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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