The gap between what the Federal Reserve says about monetary policy and what investors think it’s saying would be funny if it weren’t so important. Most of this gap is the listeners’ fault — but not all. The Fed could do a better job of explaining itself.
Here’s the relevant passage from the minutes:
“While the current asset purchase program is not on a preset course, participants generally agreed that if the economy evolved as they anticipated, the program would likely be completed later this year. ... If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, [the] final reduction would occur following the October meeting.”
As binding commitments go, and remembering that the economy rarely evolves as anyone expects, that’s pretty weak. By the way, the minutes also noted that most participants thought the decision about the last installment of QE had “no substantive macroeconomic consequences” and no bearing on the decision about when to raise interest rates.
This disconnect between plain words and the zeal to unearth their author’s true intent is a problem. If investors get too settled on a particular idea of what will happen and when, then the Fed may feel obliged to validate that forecast, despite its better judgment. It knows that if it chooses not to, this might come as a shock and could have bad results.
What should the Fed say to make it even clearer that it’s running monetary policy not on a schedule but with its eyes on changing conditions in the economy? It tried to do just this when it began including a threshold for unemployment in its announcements in 2012. But that experiment in greater clarity was short-lived because the unemployment figures haven’t behaved as expected. They’re no longer seen as a reliable indicator of economic conditions.