The Federal Reserve has opened up a great deal about how and why it
does things, but still can't get this communication thing right.
Thirty years ago, its communication strategy was to say nothing. Fed watchers had to parse bond-market data to guess at policy changes.
By the 1990s, the Fed began to acknowledge that monetary policy would be more effective if people knew what the policymakers were trying to do. Terse statements communicated the basic details, but former Chairman Alan Greenspan had a famously obfuscatory way with words.
Under Ben Bernanke, by contrast, transparency has been a watchword. The key policy body, the Federal Open Market Committee, started releasing summaries of members' economic forecasts, and in 2011 Bernanke began conducting press conferences.
The market clearly knows more than ever about what Fed policymakers are thinking and doing, but information does not equal understanding. Stock and bond investors just learned that the hard way.
Bernanke's latest press conference, on June 19, sent the stock market into a tailspin and caused long-term interest rates to rise. The 10-year Treasury note yield went from 2.2 percent June 18 to 2.6 percent a week later. That's a lot, considering that rates had already been rising in anticipation of what the Fed was going to say. (Two months ago, the 10-year rate was 1.6 percent.)
What Bernanke said was that the Fed, which is buying $85 billion of bonds each month to boost the economy, expects to stop doing so by mid-2014. He included all sorts of hedge words, saying such a move was "in no way predetermined" and "could be delayed" if the economy remains weak.
Traders skipped right past the hedge words and focused on Bernanke's timetable. Clearly, the market wasn't ready to hear that the Fed expected to be less stimulative, and soon.
In the old days, sharp corrections were par for the course when traders finally figured out what the Fed was up to. In the age of transparency, this isn't supposed to happen.
"I think the Fed is guilty of poor communications," says Kate Warne, investment strategist at Edward Jones. "Even if they communicated exactly what they wanted, they must not have expected as severe a reaction as they got."
In the last couple of days, some Fed officials have issued their own interpretations of Bernanke's statement, re-emphasizing the hedge words.
Atlanta Fed President Dennis Lockhart, in a speech Thursday, compared monetary policy to quitting cigarettes. "It seems to me the Chairman said we'll use the patch (and use it flexibly), and some in the markets reacted as if he said 'cold turkey,'" Lockhart said.
Such remarks soothed markets a bit, with stocks recapturing more than half of last week's losses. Bond yields, though, remain higher than they were before Bernanke spoke, and Freddie Mac said Thursday that 30-year mortgage rates have risen half a percentage point, to 4.46 percent, in the past week.
David Rolfe, chief investment officer at Wedgewood Partners in Ladue, thinks the miscommunication episode has turned the tables. Instead of spoon-feeding information to the market and anticipating a measured reaction, central bankers will be jittery for awhile about how traders might interpret their statements.
"The bond market now is going to influence the Fed and not the other way around," Rolfe said.
That's not a bad thing. The Fed is on the verge of some important policy decisions, and a little humility, along with transparency, can't hurt.
(c)2013 the St. Louis Post-Dispatch
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