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.
Stephen Stanley of Pierpont Securities captures the dilemma:
When the Fed extends the date in its forward guidance but emphasizes that this is only a forecast, not a commitment, the most logical reading is that officials have downgraded their economic forecasts, so that the ensuing fall in real yields is not stimulative, but a natural reaction by relevant agents in the economy to a gloomier forecast from central bankers.
That explains why the central bank seems bent on replacing the calendar guidance with numerical thresholds for policy.