Picturing The Slow Rise And Quick Fall Of Fed Credibility

Tyler Durden's picture

"There's no alternative in making monetary policy but to communicate as clearly as possible, and that's what we tried to do," is how Bernanke defended the Fed's actions over the last six months. But, as the WSJ's Jon Hilsenrath rather snarkily explains, the Fed's 'communications strategy' was a stumbling effort to let the public know what was going on as their efforts to telegraph strategy left investors confused at key points about where it was heading, and some misread Mr. Bernanke's intentions about the bond-buying program and interest rates.

That disconnect exacerbated a real-world problem: rising rates that by August showed signs of denting a budding housing recovery. Perhaps Fed's Stein sums up the farce best, "what is much more important is doing everything we can to ensure that this difficult transition is implemented in as transparent and predictable a manner as possible. On this front, I think it is safe to say that there may be room for improvement."

Via WSJ,

The Federal Reserve's decision to continue one of the most audacious experiments in monetary history—an $85 billion-a-month bond-buying program designed to boost growth—followed six months of tense negotiations inside the central bank, and a stumbling effort to let the public know what was going on.

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The saga shows how hard it is for a central bank to communicate about plans that are complicated, evolving and conditional on the economy.

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The Fed's efforts to telegraph its strategy left investors confused at key points about where it was heading, and some misread Mr. Bernanke's intentions about the bond-buying program and interest rates. That disconnect exacerbated a real-world problem: rising rates that by August showed signs of denting a budding housing recovery.

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"There's no alternative in making monetary policy but to communicate as clearly as possible, and that's what we tried to do," Mr. Bernanke said at a news conference after the Fed's September meeting.

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Fed Governor Jeremy Stein in a speech after the September meeting. "What is much more important is doing everything we can to ensure that this difficult transition is implemented in as transparent and predictable a manner as possible. On this front, I think it is safe to say that there may be room for improvement."

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The Fed has said it would continue buying bonds—a program also known as "quantitative easing," or QE for short—until it saw substantial improvement in the labor market.

By April more officials, including the governors, were getting worried about terms like "QE-ternity" and "QE-infinity" floating around financial markets, which suggested some investors thought the program was boundless, according to people familiar with Fed discussions. The Fed officials thought the job market had made enough progress to warrant discussing an exit.

"We're in this box because we've got an open-ended program, and we didn't figure out how we were going to end it when we started," Richmond Fed President Jeffrey Lacker , an opponent of the program, said in an interview.

Disagreements about how to communicate their plans boiled up at a May 1 policy meeting.

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"We think they are risking their credibility if they throw more money at a problem and it does not turn the situation around," Christopher Rupkey , chief U.S. economist at Bank of Tokyo-Mitsubishi said in a note to clients at the time.

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Mr. Stein "would have been comfortable" cutting the bond purchases then, he said in a later speech.

Dallas Fed President Richard Fisher , an opponent of the programs, supported a move. "Doing nothing at this meeting would increase uncertainty about the future conduct of policy," he later recalled saying. Not acting, he said called "the credibility of our communications into question."

Mr. Bernanke didn't want to move simply because markets expected it. "We can't let market expectations dictate our policy actions," he said at a news conference later. "Our policy actions have to be determined by our best assessment of what's needed for the economy."