Bin Appelbaum makes a fair point, via Federal Reserve governor Jeremy Stein, that clarity and predictability are important communication skills that the Fed could sharpen these days. It’s a view that’s derived from the confusion markets experienced when the FOMC (the committee that decides on monetary policy) surprised everyone—(though not me!)—by holding off on when they start to taper their asset buying program.
But, as De Niro said so memorably to Pacino (after a hyper-tense, awesome pause), “there’s a flipside to that coin.”
What if, on rare occasions, surprise is useful communications tool? To me, this was one of those moments. The Fed was, as I stressed in my writing, incessantly clear that they would be data driven, but the markets didn’t really believe that unsatisfactory data (or data expectations) would lead them off of a Sept. taper.
So, they had a choice. That could allow their policy move to be determined by a market that wasn’t listening, that was operating with more policy certainty than the Fed itself. Or they could implement the policy they deemed most appropriate to the needs of the economy, and let the market catch up. In that sense, the surprise move sent a strong signal that the Fed was serious about both being data driven and targeting the real economy.
That’s communication too, and, in my book, perfectly legit and sound.
I think that their problem was that their idea of data driven was to leave the $85B fixed while the data jumped around (although now it seems some of that was due to poor seasonal adjustments by BLS). This left them with a big change when they finally start to taper no matter the amount of the taper. If on the other hand, had they adjusted the $85B up and down $5B or so every meeting as the data jumped around, then it would not be such a shock if the changes starting adding up in one direction after a few meetings.
What might be a surprise to some is greeted with relief by those of us trying to cope in the real (data-producing) economy, knowing that at least somebody (the Fed) is aware of what we’re dealing with, and still on our side.