Rosengren Says Fed Communications Unpredictable Policy Tool

Federal Reserve Bank of Boston President Eric Rosengren
Federal Reserve Bank of Boston President Eric Rosengren. Photographer: Brendan Hoffman/Bloomberg

Federal Reserve Bank of Boston President Eric Rosengren said central bankers’ difficulty in using communications as a policy tool is underscored by the recent rise in interest rates on expectations of a reduction in the pace of the Fed’s bond buying.

“The fact that the possibility of small future changes in policy could elicit such large movements in market interest rates and asset prices emphasizes that while central bank communication can be a powerful tool, it has also proven an imprecise and unpredictable instrument in terms of its impact on long-term rates,” Rosengren, who votes on policy this year, said in the text of remarks to the Council on Foreign Relations in New York.

The yield on the benchmark 10-year Treasury note was 2.68 percent as of 2:30 p.m. in New York, up from 1.93 percent on May 21, the day before Fed Chairman Ben S. Bernanke first outlined a possible timetable for paring the central bank’s $85 billion in monthly asset purchases, according to Bloomberg Bond Trader prices. Yields have fallen from 2.99 percent on Sept. 5 after the Fed surprised investors at its meeting last month by refraining from scaling back bond purchases.

Heading into the Federal Open Market Committee’s Sept. 17-18 meeting, “many market participants thought that there was a reasonably high probability of a reduction in Fed asset purchases,” while others “saw a relatively high probability” policy makers would wait, Rosengren said, citing the Federal Reserve Bank of New York’s survey of primary dealers conducted before the meeting.

Caveats Overlooked

“This lack of unanimity was likely to generate consternation,” he said. “No calendar date was specified, and it was clearly communicated that the economy needed to progress as expected for policy to be modified -- but again, those caveats tended to get much less attention.”

Bernanke said in June that he may reduce monthly securities buying this year and halt it by mid-2014. He also said he expected the Fed would complete its bond buying when the jobless level was around 7 percent. Unemployment fell to 7.3 percent in August for what Rosengren described as an “unwelcome” reason: Americans giving up on finding work.

“Tying policy to a particular outcome for one economic variable may be observable and transparent, and reduce the uncertainty around monetary policy action -- but could also provide the wrong signal and could lead to policies that actually move the economy in a direction inconsistent with the choice a policymaker would make with more flexibility,” Rosengren said.

Taper Delay

Weaker economic data between the FOMC’s June and September gatherings, the “higher-than-anticipated jump” in bond yields, and the risk of “possible fiscal-policy disruptions” made refraining from tapering in September “warranted,” Rosengren said.

Fiscal policy is a “shock” central bankers “have to react to,” Rosengren said in response to audience questions after his speech. President Barack Obama and Republican lawmakers are debating how to end a partial government shutdown and to extend the government’s borrowing authority, which the Treasury Department says will be exhausted Oct. 17.

If lawmakers fail to reach a debt limit agreement, “it’s a shutdown on steroids,” he said. It would send interest rates higher for all Americans “not only now, but for the foreseeable future.”

The Fed, which lowered its target interest rate to near zero in December 2008, can’t lower borrowing costs enough to offset the potential damage, he said.

Communications Difficulties

“The experience of the past several months makes it clear that a data-driven policy that also considers the risks to our forecasts can be difficult to communicate,” Rosengren said. “Combined with the lack of historical precedent for many of the Fed’s recent monetary policy actions, these challenges make us realistic and humble about our ability to gauge the likely impact of our communications at the zero lower bound.”

The ability to communicate well has become an increasingly important quality for the chairman of the Fed since Bernanke has begun holding press conferences after policy meetings, Rosengren said in response to audience questions. Janet Yellen, Obama’s nominee to succeed Bernanke, will be a successful communicator, Rosengren said.

Yellen, who has headed a Fed communications subcommittee and helped designed its transparency initiatives, “will be very good at speaking very precisely, very clearly, and very calmly,” Rosengren said.

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