Fed Races Ahead With Wait-and-See

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No one should have been disappointed. The Federal Reserve concluded its meeting today and issued astatement that was practically a carbon copy of September's. The Fed will continue buying $85 billion of bonds a month as it awaits "more evidence" that the economy is continuing to improve.

I'm not sure why some folks were expecting more: some insight into the triumph of the anti-tapering forces at last month's meeting; or inferences on the costs and benefits of asset purchases. Heck, this is a statement, not a treatise.

It was interesting to see one qualifier removed from today's statement, that the "tightening of financial conditions" could slow the pace of improvement in the labor market and economy. Its omission exposes policy makers' obsession with long-term interest rates, which have come down in the past month. Financial conditions, which are a reflection of liquidity and credit conditions in various markets, were no tighter at the time of the September meeting.

Since there was little change in the Fed's statement, outlook or message, this might be a good time to revisit the subject of forward guidance as a policy tool. Readers know my views on the subject. I refer to it as "talk therapy," and that pretty much sums it up. Yes, it's nice to share with us what you plan to do next month, next year, three years from now and what the conditions are for implementing the plan as outlined. When you are the Fed, the central bank of the U.S. and by proxy for the world, it matters a lot what you are going to do. If you say you are going to do one thing and don't do it or end up doing something else, you have to wonder why you bothered with guidance in the first place.

That's why the Fed should stick to broad, big-picture statements. Reiterate your dual mandate -- full employment and stable prices. Give us your targets, share with us your forecast, even offer your best hunch on the timing of tapering. But don't start offering interim targets or tying a specific dollar reduction in asset purchases to tenths-of-a-percent changes in the unemployment rate. You're only going to inspire criticism from traders who lost money and want to blame you for communicating unclearly.

So say it simply, say it often if you like, but don't get into areas where you're likely to regret your words. When you have no idea what you are going to do next or when that will be, it's hard to provide a well-delineated map to everyone else.

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