This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Fed's Next Communication Challenge: Less Is More?

NEW YORK (TheStreet) -- Central bankers have fallen in love with words. With benchmark rates in much of the developed world near zero, eliminating the traditional source of monetary stimulus, policy makers turned to talk to telegraph their intentions. The idea was that assurances of a continued low short-term interest rate would reduce medium- and long-term rates and encourage economic growth.

The Federal Reserve considers market expectations such a crucial element of its strategy that it elevated "forward guidance" to a policy tool. What happens when the Fed has to change course? Will their crystal balls get a bit cloudy? We may be seeing hints of that already.

Fed Chairman Janet Yellen used her April 16 speech to the Economic Club of New York to recap the "evolution of the Fed's communication strategy." And evolve it has, at a record pace (compared to the eight decades it took for the Fed to begin announcing its policy changes). As recently as 2010, the Fed's forward guidance consisted of an indefinite pledge to hold the funds rate near zero "for some time" or "for an extended period." In 2011, the Fed switched to calendar-based guidance ("until mid-2013" or "until mid-2015"). Then came quantitative thresholds in December 2012 ("at least as long as the unemployment rate remains above 6.5%"). And in March, with the unemployment rate closing in on that threshold, the Fed reverted to qualitative (read: fuzzy) guidance. Policy makers will now consider "a wide range of information," including indicators of the labor market, inflation and financial conditions, in setting policy.

Now that's informative! They might as well state their dual mandate -- maximum employment and 2% inflation -- and leave it at that.

The Fed reiterated its qualitative guidance at the conclusion of its meeting Wednesday and announced another $10 billion reduction in monthly asset purchases to $45 billion.

The return to qualitative guidance suggests the Fed is starting to realize the implications of speaking too clearly in a rising interest-rate environment. In the same way that financial markets priced the Fed's highly accommodative policy into the future, those same markets will adjust immediately once the Fed lays out a trajectory for restoring the funds rate to a more normal level. The Fed views the neutral funds rate -- the rate that will keep the economy growing at its potential in perpetuity -- at 4%.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $131.03 -1.20%
FB $81.14 -0.94%
GOOG $554.13 -0.22%
TSLA $230.92 -0.27%
YHOO $44.35 -0.02%

Markets

DOW 18,092.95 +54.98 0.30%
S&P 500 2,113.16 +4.24 0.20%
NASDAQ 5,058.6160 -1.63 -0.03%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs