The Federal Reserve’s new communication strategy was supposed to make it easier to decipher the intentions of the famously secretive institution.
Markets, however, seem to have missed the memo.
Investors increasingly have focused on predicting the moment the Fed will start to pull back on its massive stimulus program, causing more volatility in stocks and bond markets. Could it come as early as this week, when the central bank’s policymaking committee meets in Washington? Or will the Fed wait until the end of the year, when the fiscal drag is expected to have run its course? Will it make the announcement with a news conference or forge ahead with little explanation?
It is the type of parlor game the Fed had hoped to avoid. Instead, it has tried to convince the markets that the date is less important than the data.
Fed officials deliberately chose not to attach a time frame to their easy-money policies when developing their forward guidance for the public last year. Instead, for the first time, the Fed formally linked its decisions to the health of the economy: Interest rates would remain near zero, at least until the unemployment rate hit 6.5 percent or inflation reached 2.5 percent. And the Fed would keep pumping money into the recovery until there was “substantial improvement” in the job market.