So why did the Fed’s action reap a blast of criticism?
Reuters said 33 of 48 economists it polled faulted the Fed for being “unclear” in its communications, adding, “It is rare for a consensus of economists to criticize a major central bank.” The Wall Street Journal said Mr. Bernanke’s announcement was “the latest in a series of communications missteps.”
But perhaps their ire would have been better directed at the lawmakers in Washington who are trying to shut down the government and are threatening to default on the national debt. “Nobody knows what will happen with the budget and the national debt ceiling,” Alan Blinder, a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve, told me this week. “The second of those is a major hazard to markets and the economy. It doesn’t take a genius to figure out that this might have given the Fed some second thoughts” about tightening.
The Fed’s action clearly surprised many professional investors, who were betting the Fed would start to tighten monetary policy, driving down stock and bond prices. When their bets turned out to be wrong, many of them aired their complaints with the Fed in the media.
The criticism plainly exasperated the usually unflappable Fed chairman, who has made greater communication and transparency a hallmark of his tenure. At a news conference on Sept. 18, he said, “I don’t recall stating that we would do any particular thing in this meeting,” and added somewhat tartly that the Fed’s mandate is to do what’s best for the economy and not what’s best for a small group of professional investors. “We can’t let market expectations dictate our policy actions,” he said.
Professor Blinder agreed with the chairman. “A small number of bond traders got burned by this, and when bond traders get burned they tend to blame the Fed,” he said. “And they should realize the Fed is not there to please them.”
At least some market professionals read the Fed’s signals right. Michael Hanson and Brian Smedley, analysts at Bank of America Merrill Lynch, presciently warned before the Fed’s meeting that “the markets believe a September taper is a done deal,” but “we anticipate the Fed will attempt to recalibrate market expectations at this meeting. In our view, the best way to do that is by not tapering in September.”
Bill Gross, Pimco’s founder and widely followed bond and interest rate expert, also warned that market expectations had gotten ahead of reality, suggesting the Fed was more likely to “tinker” than “taper.”
Justin Wolfers, a professor of economics at the University of Michigan who is currently at the Brookings Institution in Washington, told me this week that investors shouldn’t have been so surprised. “Bernanke never promised to taper in September,” Professor Wolfers said. “He always said the decision was data-dependent.” It turned out that “the data were worse than when he first started talking about tapering.” And with a fiscal showdown looming in Congress, tightening monetary policy now would have been reckless, he said.
“There’s no reason to do it now when the Fed can wait a few months and see if this crisis is averted. Market professionals are whining about the Fed’s poor communication skills,” he said. “But the Fed has a clear statutory mandate, and keeping traders happy is not one of them.”
Even so, he and other economists I interviewed also agreed that Mr. Bernanke and the Fed bore at least some responsibility for the market’s confusion, especially given the Fed’s stated goal to reduce uncertainty and avoid market surprises. In June, Mr. Bernanke said that the Fed might begin to scale back its stimulus program before the end of the year, which many analysts interpreted as hinting at a September date. And he set a specific unemployment rate target of 7 percent for ending its monthly purchases of government bonds. Now, he’s saying the reduction in bond purchases might still begin before the end of the year, but he left open the option of continuing it beyond then. And he played down the importance of the unemployment data in setting Fed policy.
Article source: http://www.nytimes.com/2013/09/28/business/the-fed-and-investors-in-need-of-talk-therapy.html?partner=rss&emc=rss
