Fed Befuddles Market

What does it mean to ease monetary policy?

Don't ask the Federal Reserve, because it seems slightly unsure at the moment.

On Tuesday, traders sold stocks and bought bonds, believing the Fed was not willing to ease key interest rates enough to relieve credit market pressures. Less than 24 hours later, the message from the Fed is the reverse, but through enhanced liquidity injections -- and all in the name of stabilizing financial markets.

This all comes from Fed Chairman Ben Bernanke, who has spoken often in his nearly two-year tenure about ways to improve communication and transparency at the Fed.

Wednesday morning, the Fed announced a coordinated effort with foreign central banks to create a temporary system that will inject over $40 billion of liquidity into the financial system for periods of 28 days. In the accompanying statement, the Fed added that "experience gained under this temporary program will be helpful in assessing the potential usefulness of augmenting the Federal Reserve's current monetary policy tools." The Fed said it expects to seek public comment on making this temporary auction program permanent.

"Does this mean traders should watch for clues that the Fed might use the term auction facility instead of reading the FOMC statement or worrying about rates?" says James Bianco, president of Bianco Research.