MacroScope

For a central bank that likes to tout the importance of clear communication, the Federal Reserve sure knows how to be obtuse when it wants to. Take Bernanke’s testimony before the Joint Economic Committee of Congress last month. His prepared remarks were reliably dovish, emphasizing weakness in the labor market and offering no hint of an imminent end to the current stimulus program, which involves the monthly purchase of $85 billion in assets.

It was during the question and answer session that the real fireworks came. Asked about the prospect for curtailing such bond buys, Bernanke said:

If we see continued improvement and we have confidence that that’s going to be sustained then we could in the next few meetings … take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward.

Those three little words, “next few meetings,” proved rather costly to global financial markets – about a trillion bucks a word in stock value losses.

Was it a miscalculation or a trial balloon, investors wondered. Rather hawkish comments from normally dovish regional Fed presidents like Eric Rosengren of Boston and John Williams of San Francisco seemed to cement the notion that this was a concerted message. It remains to be seen how Bernanke will navigate the issue at Wednesday’s press conference, one of only four per year.

Is Federal Reserve Chairman Ben Bernanke avoiding the word “taper” in order to temper expectations that the U.S. central bank will ratchet down its massive bond buying program? This is one view that’s been widely bandied about in recent days.

But then why is it that the Fed officials who are most eager to “taper” have pretty much stopped using the word, too?

The last time Dallas Fed President Richard Fisher used the “T” word in a public speech was in February. But there’s no evidence at all that he’s backing off from his support of the idea. He’s been adamant the Fed should not yank the punch bowl away (or, in his words, go from Wild Turkey to cold turkey) but should gradually reduce stimulus.

Jonathan Spicer contributed to this post

When the Fed adopted thresholds for its low interest-rate policy last December, Fed Chairman Ben Bernanke said they would make “monetary policy more transparent and predictable to the public.” But now that the policy is fully in place, it doesn’t seem that the public and the Fed are predicting the same thing at all. Not even close.

In their policy statement following a two-day meeting that wrapped up Wednesday, Fed policymakers removed any reference to date-based policy guidance, saying only that exceptionally low rates would remain in place as long as unemployment remains above 6.5 percent and inflation is not seen to top 2.5 percent. But as recently as December, the Fed’s statement suggested policymakers did not believe those thresholds would be met until at least mid-2015.

The market, as personified by traders ofU.S.short-term rate futures at the Chicago Board of Trade, believes differently. According to CME Group’s FedWatch, which uses fed fund futures prices to estimate market expectations, traders were pricing in a 55 percent chance of a first rate hike by October 2014 – eight months before the Fed’s forecast last month. Threshold-based policy does not seem to have brought the market and the Fed onto the same page – not even to the same year.

Sometimes, communication can be the art of what not to say. Federal Reserve Chairman Ben Bernanke took pains this week to make clear that the central bank’s indication that it will likely keep rates low until mid-2015 does not mean it expects growth to remain weak for that long.

By pushing the expected period of low rates further into the future, we are not saying that we expect the economy to remain weak until mid-2015; rather, we expect – as we indicated in our September statement – that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

The comments speak to a key problem with the notion of calendar-based forward guidance, first adopted by the Fed in August of 2011: each time officials push the date further into the future, they risk dampening financial market sentiment, thereby having the opposite effect to the stimulus it intended.

Janet Yellen, the Federal Reserve’s influential Vice Chair and possible future replacement for Chairman Ben Bernanke, delivered an important speech this week. Entitled “Revolution and Evolution in Central Bank Communications,” Yellen traces the deep shift in sentiment towards the importance of policy transparency.

In 1977, when I started my first job at the Federal Reserve Board as a staff economist in the Division of International Finance, it was an article of faith in central banking that secrecy about monetary policy decisions was the best policy: Central banks, as a rule, did not discuss these decisions, let alone their future policy intentions. While the Federal Reserve is required by the Congress to promote stable prices and maximum employment, Federal Reserve officials at that time avoided discussing how policy would be used to pursue both sides of this mandate. Indeed, mere mention of the employment side of the mandate, even by the mid-1990s, was described in a New York Times article as the equivalent of “sticking needles in the eyes of central bankers.”

In her remarks, Yellen endorsed the concept of policy thresholds first championed by Chicago Fed President Charles Evans. Her backing suggests such numerical guideposts for policy – we’ll keep stimulating until jobs improve and as long as inflation doesn’t creep too far from the Fed’s 2 percent target – are effectively a done deal, though it remains unclear how quickly policymakers can agree on the details.

Jonathan Spicer contributed to this post

An important part of the Federal Reserve’s recent decision to embark on an open-ended quantitative easing program was a fresh indication that the central bank will leave rates low even as the recovery gains steam. According to the September policy statement:

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

Just why does the Fed believe promising to keep policy stimulus in place for a long time might help struggling economies recovery? Mike Feroli, chief U.S.economist and resident Fed watcher at JP Morgan, traces the first inklings of the idea to the work of Paul Krugman, the Nobel-prize winning economist and New York Times columnist.

In a historic shift in the way the Federal Reserve conducts monetary policy, the U.S. central bank last week announced an open-ended quantitative easing program where it has committed to continue buying assets until the country’s employment outlook improves substantially. Bank of America-Merrill Lynch credit analysts captured Wall Street’s reaction:

With an open-ended QE program to buy agency mortgages, and an extremely dovish statement, the Fed managed to provide a positive surprise for a market that was expecting a lot.

The new plan is really not that different from adopting a defacto growth target. Still, given the lack of complete consensus on the matter within the Fed, its Chairman Ben Bernanke was forced to stick with words rather than numbers to convey his message of central bank commitment. From the Federal Open Market Committee Statement:

It’s something of a dissonant communications strategy: Fed officials are willing to tell us what they think will happen three years from now, but not what they discussed three years ago.

The Federal Reserve’s public relations arm holds up the chairmanship of Ben Bernanke as a model of transparency. And it’s true. Press conferences and federal funds rate forecasts are major steps forward for a central bank that until the mid-1990s didn’t even tell the markets what it was doing with interest rates.

Still, the old habits of secrecy die hard. Monetary policy transparency aside, the Fed has remained adamantly opaque in other ways – to the point that it took a Bloomberg News lawsuit for it to name the recipients of emergency era loans.

Thursday, April 12

SYRACUSE, N.Y. – Federal Reserve Bank of New York President William Dudley speaks on regional and national economic conditions before the Center for Economic Development, 0715 EDT/1115 GMT. Audience Q&A expected.

ATLANTA – Federal Reserve Bank of Atlanta President Dennis Lockhart moderates “Bridging the Border: Reinforcing Ties Between the U.S. and Mexico” panel discussion presented by the Federal Reserve Bank of Atlanta and the World Affairs Council of Atlanta

SYRACUSE, N.Y. – Federal Reserve Bank of New York President William Dudley speaks on regional and national economic conditions before students and faculty at the Maxwell School of Citizenship and Public Affairs at Syracuse University, 1100 EDT/1500 GMT.

The Fed is being more transparent. Any questions? Lots, apparently. Wall Street economists have published a flurry of research notes speculating about just how much new information the U.S. central bank will release along with its federal funds forecasts on Wednesday, and what form it will be presented in.

Even Vincent Reinhart, a former Fed economist now at Morgan Stanley, doesn’t know what to make of it:

Many market participants admit to being somewhat confused about the new disclosure policy. The exercise should be viewed as incremental in nature, limited by design flaws, and as likely to cloud as to clarify the public’s understanding of policy intent, at least at the outset. And the mission statement, if one appears, may amount to little more than a strong commitment to motherhood and apple pie among central bankers – i.e., the importance of price stability in the long run – but provide no practical guidance as to near-term policy choices.