SO that is cleared up then. The Federal Reserve wanted to raise rates in September but then lost its nerve over China’s stock market crisis. Instead, it will probably move in December. No harm done.

The return to normal is on course barring a minor hiccup in the schedule. That, at least, was the gist of Janet Yellen’s message. Yet she also hinted she could simply repeat last week’s line in December.

Investors would be forgiven for feeling confused. If the risk of an emerging market shock was the Fed’s main worry in the third quarter, what are the chances it will have receded by the fourth? Presumably they are slim. In which case, is a delay of a few weeks remotely adequate to the risks?

Nobody said central banking was easy. But Ms Yellen’s communications have recently been at sixes and sevens. The Fed started off 2015 indicating that it would exit from zero-bound interest rates this year. Initially speculation focused on June. But another winter contraction in the economy pushed that back.

Then it needed to be sure the second quarter rebound was real. Expectations were nudged back to September. It concluded the rebound was on track. Joblessness continued to fall at a rate that implied wage inflation was not far off. In between, the China crisis struck along with signs its authorities lacked ‘deftness’ in handling it.

More hawkish officials worry that each time the Fed limbers up for an interest-rate increase, market volatility increases, credit conditions tighten and the Fed feels obliged to postpone

Now the timetable has slipped again. By December the US economy may be heading into another quarterly contraction. Moreover, China’s problems, and those of other emerging markets, are likely to take years to work out.

Ms Yellen has thus laid a recurring trap for herself. More hawkish officials worry that each time the Fed limbers up for an interest-rate increase, market volatility increases, credit conditions tighten and the Fed feels obliged to postpone.

But, as Evercore ISI’s Krishna Guha points out, what looks like a ‘Groundhog Day’ problem is really a symptom of the fact the Fed has underestimated the danger from emerging markets. The Fed takes a credibility hit when it delays taking action for reasons not well flagged in advance. The build-up to the December meeting may be bumpier than the countdown to last week’s. If it delays again, that will only grow.

Therein lies Ms Yellen’s vulnerability. Many believe the Fed should mean what it says and raise rates regardless of short-term noise. The US central bank’s credibility is on the line. But the damage to the Fed’s reputation would pale against its loss of face were it to raise rates only to reverse itself thereafter. Other central banks, including Sweden and the European Central Bank, have tightened too soon and been forced to rescind. The Fed has no wish to join their ranks. Ms Yellen was thus right to keep rates on hold. The danger of triggering an emerging market shock was too great. But she did not go far enough. Every emerging market tremor will boost speculation of another delay in December. Ms Yellen needs to spell out what will guide her decision before then.

It is not just a language problem. Communication difficulties are usually a symptom of deeper flaws. Ms Yellen has fallen into two traps. The first was to place a higher priority on consensus inside the Fed than on public clarity. That has made her more slow-footed in reacting to shifts in global conditions than she needed to be. The second was to make the Fed a hostage to fortune by saying it would raise rates in 2015. In Fed jargon, Ms Yellen substituted data-dependency — responding to conditions as they arise — with forward guidance, which laid out a timetable for the cycle to turn. Last week Ms Yellen took a welcome step back from the latter. But investors can have little confidence she will not switch again.

At least she is now moving in the right direction. Even without concerns about a global recession, the US economy shows few signs of overheating. Hawks say inflation will only manifest itself when it is too late. But the risks of tightening too soon are far greater. US inflation is far short of the Fed’s 2pc target. Were it to overshoot, the Fed could respond with consecutive rate rises. At this point, that would be a nice problem to have.

Even today, with US unemployment having fallen to 5.1pc, there are no signs of wage inflation. Last year US median household income actually fell by 1.3pc, according to the US Census. US corporate investment shows no signs of picking up. America’s recovery is still vulnerable.

So what happens now? At any stage in the cycle, it is better to have a Fed chair ready to change tack when the situation dictates — as Ms Yellen did last week — than one who sticks rigidly to past utterances. Ideally she would have avoided it in the first place.

Ms Yellen’s priority now must be to spell out that the Fed is poised to react to an emerging market shock — by launching another round of quantitative easing, if necessary, or via negative interest rates. Equally, she would be ready to start the long-awaited turn if things improved.

Since taking the job, Ms Yellen has juggled with different types of communication. They call this learning by doing. As the next countdown begins, her goal must be to share her thinking more clearly.

edward.luce@ft.com

Published in Dawn, Business & Finance weekly, September 28th, 2015

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