Central Bankers Lost in Communication

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In a speech on Friday, Federal Reserve Governor Jerome Powell took exception to criticism that the decision to refrain from tapering asset purchases last month had damaged the central bank's credibility. "Market expectations are now better aligned with Committee assessments and intentions," Powell said, pointing to the market's revised estimates of the path for the federal funds rate.

With all due respect, Governor Powell, financial markets weren't responding to what the Fed said but to what the Fed did -- or in this case, didn't do. The Fed has made it clear that tapering precedes tightening. If the Fed delays the date at which it intends to start paring bond purchases, it shifts the end date out as well. It also extends the timeline for the first funds rate increase.

So no, it really wasn't what you said that re-aligned market expectations with your own. The Fed is so wrapped up in its communication -- what it says, what markets will think about what it says -- that it has gotten lost in the weeds (or is it the words?).

For example, some policy makers were concerned that the decision not to taper at the Sept. 17-18 meeting, contrary to expectations, would convey "a message of pessimism regarding the economic outlook," according to the minutes. And what if it did? Had you been optimistic about the economic outlook, tapering would have proceeded as outlined in the months leading up to the meeting. It really mattered very little what you said after the meeting. The decision said it all.

Yes, it was informative to learn from the minutes the reasons behind your decision not to taper: fiscal headwinds and uncertainty over the debt ceiling; "mixed" economic data; and a rise in long-term interest rates, which for you is tantamount to a tightening of financial conditions. But the market would have gotten the same message by your inaction alone.

I just wanted to make sure I'm communicating clearly.

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