When even the Fed's personal trusted scribe, the WSJ's Jon Hilsenrath, who at least on one occasion saw substantial editorial influence by the NYFed on his upcoming article (dealing with his "prize winning" investigation into Stephen Friedman), accuses the Fed of failing to communicate, one can imagine just how badly the streams of telegraphing futures step by the Marriner Eccles central planners must have gotten crossed. From Hilsy: "Federal Reserve officials created new uncertainty about how much farther they will push their easy-money policies—and new questions about how effective they are at communicating their thinking—with the decision to stand pat on the pace of their bond purchases for now. The Fed on Wednesday went beyond merely deciding to keep buying the $85 billion a month of mortgage-backed securities and U.S. Treasurys that it had been telegraphing for months it might start winding down. In the news conference after a two-day policy meeting, Fed Chairman Ben Bernanke also seemed to walk away from some of the guidance he had given in June on how the bond-buying program would play out over the next year, making it even less clear when the program will end." This is ironic, because it was none other than Hilsenrath back on May 10 who wrote "Fed Maps Exit from Stimulus" in which he first laid out that "Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations." How does it feel to have been used Jon?
Or maybe there is something bigger afoot: if indeed there is a change at the helm of the Fed, and if Hilsenrath was used and abused constantly over the past four month to leak inaccurate monetary policy, does this mean that the WSJ "reported" will no longer be the preferred method of information dissemination for both the NY Fed and the DC-based mothership? If so, a bigger question is who will replace Hilsenrath as the Fed's PR agent: a decision which in some ways may be just as important as who will be the next Fed chairman... unless that too was one big trial balloon and come January Bernanke simply extends his governance of the developed world's money supply for a third consecutive term.
Some more from the WSJ:
In his defense, Mr. Bernanke said that he has never said the Fed would start the pullback in September and that the decision always depended on the economy's vigor. "I don't recall stating that we would do any particular thing in this meeting," Mr. Bernanke said at the news conference.
Yet some investors and analysts said the Fed's action was the latest in a series of communications missteps, demonstrated by the fact that numerous surveys showed investors broadly expected the central bank to move in September.
Fed officials place heavy weight on communicating clearly to investors how they're likely to behave. They believe that guiding the public about the Fed's future actions influences spending and investing decisions in the present, making monetary policies more effective in helping the economy. Part of the Fed's strategy, for instance, is to assure the public that it will keep short-term interest rates low for several years and that its bond-buying program will be in place as long as the economy needs added support—signals aimed at holding down long-term interest rates to boost growth.
But the events of the past months and Wednesday's market reaction show the potential pitfalls when Fed communications on monetary policy—the so-called forward guidance—are conditional, complicated, nuanced or misread by much of the investing public.
And whose fault is that Jon?
Some analysts questioned the Fed's credibility Thursday after its decision to hold off.
Hmmm, wonder why...
Finally, here is Bank of America once again, figuring out any additional reasons besides the abovementioned for said "failure to communicate"
What we've got here is a failure to communicate
When bond yields drop 16 bp on the day of a Fed meeting, you can be sure there has likely been a major miscommunication between the Fed and the markets. Here we explain the cause of the breakdown, assigning "blame" to both the Fed and the markets, and drawing lessons for future Fed watching.
In the run up to the Fed meeting, we argued that it was too early for the Fed to taper - neither the growth nor the inflation data justified tapering, and September was a very awkward month for the Fed to change policy given a variety of rising risk factors. However, that was very much a minority view. Most analysts and investors viewed tapering as a done deal. They noted in particular that if the Fed were not going to taper in September, Fed leaders would have come out and "protested" against the strong September consensus. What happened?
The hole in Jackson
From the Fed perspective we see three possible causes of confusion.
First, Fed thinking almost surely steadily evolved as the meeting approached. Back in May when the tapering talk started, the case for moving "later in the year" seemed strong. The economy seemed to be handling the fiscal shock. The inflation slowdown seemed "transitory". And it was plausible to argue for acceleration to 3% GDP growth in the second half.
As the meeting approached, however, the growth data refused to pick up, with almost a perfect mix of better and worse data. At the same time, most of the inflation data remained weak. Over time the Fed moved from saying low inflation is "transitory," to a formal dissent from St. Louis Fed President Bullard, to a formal recognition of downside inflation risks in the directive, and finally to dropping the "transitory" claim. This gradual evolution in thinking seemed to go largely unnoticed among Fed watchers. Every downside surprise was greeted with the refrain: "it's weak, but not enough to change the prospect of tapering."
Second, we believe Fed officials had not made up their mind before the meeting. Hence, rather than push back aggressively against the consensus, they simply repeated their official line: September is possible and we are likely to taper later this year. As we noted at the time, tapering was very much a game-day decision. The leadership at the Fed apparently did not want to come out and risk head-faking the markets by saying: "listen, we are not ready to move" because they just weren't sure.
Third, we think this was an awkward period for the leadership of the Fed to make a forceful statement. Chairman Bernanke is a lame duck and seems to be taking a lower profile. Indeed, his decision not to speak at Jackson Hole left a crucial gap in his normal speaking schedule. At the same time, as a leading candidate to replace Bernanke, Vice Chairman Yellen was taking an even lower profile.
The miscommunication likely reflected not only a mute Fed, but markets that didn't listen. In particular, we think many market participants downplayed the Fed's official explanation for tapering - a much better economy - and substituted or supplemented their own.