This Day On The Street
Continue to site right-arrow
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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

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

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
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!


DOW 18,062.80 +32.59 0.18%
S&P 500 2,091.31 +9.43 0.45%
NASDAQ 4,813.2030 +39.7310 0.83%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs