Conflicting signals from Fed speak have central bank watchers back to playing the word game, adding renewed weight to every nuance that can be gleaned from official speeches and pronouncements. There is good reason for the mixed messages. Fed policymakers face a tricky task trying to ensure their commitment to an accommodative stance while also having to assure investors and the public that they will remove the punchbowl before the party gets out of hand.
Eric Lascelles at TD Securities applies a little physical mechanics to the study of Fed chatter.
The contemplation of signal-to-noise ratios is usually the exclusive domain of electrical engineers. But this subject has become of increasing relevance to economists due to the sheer number of Fed Governors and Presidents who are now proffering their myriad views on a daily basis. It has become increasingly difficult to separate what constitutes a reliable signal of future monetary policy from the inconsequential noise. The monetary policy signal-to-noise ratio is currently very low. This partly explains why expected bond market volatility remains so high – central bankers as a collective are not offering anything close to a clear path forward.
Lascelles errs on the side of dovishness, telling his readers to focus on what Chairman Bernanke has to say. “The TD view remains that the Fed will surprise many in how long it manages to remain on hold, with a first hike coming in Q1 2011.”
Recent press reports alluded to the possibility that the Fed might be pondering some shift in its language, either removing or moderating its vow to keep rates low for an “extended period.” But former Fed Governor Larry Meyer, now at Macroeconomic Advisors, says all the talk about a verbal baby step toward tightening is just that.