Ground control, we have a Fed communications problem

Thu Sep 19, 2013 5:51pm EDT
 
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By Pedro Nicolaci da Costa

WASHINGTON (Reuters) - For a central bank that prides itself on transparent communications, the U.S. Federal Reserve has a clear messaging problem.

After months conditioning financial markets for a likely September start to a reduction in stimulus, the Fed's inaction this week stunned investors, leaving many wondering how much stock they can put on the verbal nods of policymakers.

The possibility of a trim to the Fed's $85 billion monthly pace of bond purchases in September had been pretty widely telegraphed by officials. A Reuters poll published last week found that 49 of 69 economists expected a move.

This week, however, Fed policymakers found themselves in a curious position: their plan to curb their purchases had led to a run up in interest rates they worried could harm the economy.

Now, traders are questioning whether the Fed will make any changes to its asset buying plans this year at all, indicating just how volatile the markets' forecasts for the path of Fed policy have become - despite assurances from officials that they are doing their best to provide clear guideposts.

More importantly, some analysts are concerned the bungled communications could lead markets to distrust the signals the Fed is sending, a potential problem for a central bank that increasingly is relying on forward policy guidance to influence borrowing costs.

"Credibility requires consistency," said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets. "The question now seems to be not if the Fed tapers this year, but rather when in 2014 do they taper."

SHOT IN THE FOOT   Continued...

 
An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst