The Fed's Been Clear, But The Market Misinterprets

Excerpt from Raymond James Economist Dr Scott Brown's latest economic commentary:

Federal Reserve officials will meet on December 11 to set the course of monetary policy. A growing rift appears to have developed between the district bank presidents (who have traditionally been more hawkish on inflation) and the Fed governors (who have traditionally been more pragmatic). In public speeches, the Fed’s district bank presidents have suggested that the Fed has already done enough and that inflation is a serious threat. In contrast, Fed Vice Chairman Kohn and Fed Chairman Bernanke have opened the door for another cut. Yet, they didn’t actually walk through that door. Instead, they indicated that the FOMC’s decision would depend critically on incoming information.

Two weeks ago, the Fed released revised projections of growth, unemployment, and inflation. Among other changes to its communication policies, the Fed will release these forecasts in the minutes of the FOMC meetings for January, March, June, and October. These projects will be accompanied by an expanded narrative, a discussion of risks, and some explanation of the degree of dispersion among the individual forecasts of Fed officials.

As Fed Chairman Bernanke indicated a few weeks ago, the Fed’s projections serve three purposes. First, there are forecasts, reflecting where the Fed thinks the economy is headed in the near term. Second, the projections are a (highly) provisional plan for monetary policy. Finally, they are an evaluation of certain long-term features of the economy. Forecasts are presented as a range of individual predictions (the high and low) and also the central tendency, which excludes the three highest and three lowest projections...

Bernanke’s tenure has been characterized as one of troubled communications with the financial market. I think the Fed Chairman has been clear. It’s the markets that have often misinterpreted his comments. Much of the financial press concluded that Bernanke signaled a pending rate cut last week. However, he merely opened the door. Faced with improving credit market conditions, the Fed seemed reluctant to ease in October, but feared disappointing the markets, which had firmly priced in a cut. With credit conditions having deteriorated since the October policy meeting, the Fed faces disappointing the markets even more if it doesn’t move on December 11.