From the FT's Lex blog
The Federal Reserve’s latest attempt at transparency has got seasoned Fed-watchers worried. They fear Fed-speak might go the same way as Cobol or Kremlinology.
But like other shifts in the Fed’s communication policy, there will probably still be plenty of room for interpretation.
The minutes of the Federal Open Market Committee’s meeting last month reveal that it will mimic Sweden’s Riksbank and publish each member’s predictions for future levels of target rates, and their expectations of when they will move. Compared to the regimes of Paul Volcker, when no rate targets were published, or Alan Greenspan, whose gnomic utterances spawned a cottage industry of cryptographers, this is progress. Clear quantitative guidance should reduce the risk of accidents.
But it must be viewed in context. The Fed has dug itself a hole by promising to leave rates unchanged well into next year. Some governors want to prolong that period. This new strategy offers an elegant way to prepare markets for this. Emphatic guarantees of low rates into the future are important, as they push the Fed’s direct influence further along the yield curve. Also, the Fed must exit from the current extremely low rates some time; this policy will help prepare the market.
But the ability to obfuscate is not lost. It is not yet clear how the data will be presented, but a few outlying projections could have a big effect on expectations. Individual governors might deliberately exaggerate their forecasts in a bid to shift sentiment.
So there will be extra excitement on FOMC afternoons this year, and extra volatility in the following days, as everyone digests the new data. The chances of rates staying lower for longer have risen a bit. And in the longer run, the Fed will always maintain the right to take the market by surprise; even with this extra transparency, it will keep Fed-watchers fully employed.
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