What the Fed Said, or, What You Heard Isn’t What I Meant

I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.

Alan Greenspan said it, but it certainly captures what current Fed chairman, Ben Bernanke, has to be thinking. In his efforts to be open and transparent, Bernanke has struggled over recent weeks to make himself understood. Markets reacted to talk of tapering the bond-buying QE program as if the Fed had announced that it would be hiking the fed funds rate to 5% by Labor Day. So since the last Fed meeting, Bernanke and several Fed governors have been in the public eye trying to clarify that “tapering” is not “tightening.”

With the release of the latest FOMC meeting’s minutes (available here), and echoed in his speech on July 10 (text here), we saw a bit more clarity that’s meant to ease markets back towards Bernanke’s intended message. Two key points that you can pull from the recent Fed communications:

  1. The Fed is increasingly confident in the sustainability of the recovery in the economy, in the labor markets, and in consumer spending. And that’s a good thing! It’s certainly a sign of a strange world when positive economic news can move markets lower because they’re worried that the Fed is going to “take away the punch bowl.”
  2. Tapering is not tightening. Put in motoring terms – the Fed isn’t hitting the brakes, they’re just lightening up on the gas. What’s clear from the FOMC minutes, and from his speech on Wednesday evening, is that slowing down on bond purchases doesn’t imply an end to monetary accommodation. In fact, Bernanke emphasized that he believed that the U.S. economy needed that accommodation; however, he wasn’t talking about bond purchases, he was talking about delaying interest rate hikes.

From my point of view, Bernanke has been remarkably consistent in his public comments on monetary policy. When you read through the FOMC minutes, though, you are reminded that it’s a committee of 19 participants. When some of the more hawkish members speak up and get quoted in the minutes, there’s always the chance that markets will lend more weight to those dissenting opinions.

Maybe the solution to bridging Fed intentions with market interpretations is for every Fed chairman to hold press conferences and FOMC meetings wearing a t-shirt with the Greenspan quotation emblazoned on the front?


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  • Shannon Miller

    Great input as always Bob!

    • Bob Baur, Chief Global Economist, Principal Global Investors

      Thanks Shannon! And thanks for reading!