Fed Minutes Gain Communication Stature
With nominal US interest rates still very much bound at super-accommodative levels, the Federal Open Market Committee (FOMC) has been forced to deploy increasingly nuanced ways to massage financial market expectations about the prospective path of monetary policy. Only Chair Yellen can speak on behalf of the FOMC, but she has been far less prolific than former Chairman Greenspan in making the case for tightening policy. Financial markets have, therefore, been confronted with unnecessary opaqueness about the future policy direction. Given the diversity of opinion on the FOMC, the views of individual members about the economy and consequently the policy outlook have merely added to the fickleness of expectations. The contents of FOMC press releases are analysed with great detail, but their very brevity often leaves a degree of ambiguity about future policy conduct. Furthermore, the importance attached to the minutes of policy meetings has also increased. They are supposed to provide an accurate description of how these gatherings unfold. It appears that Fed Chair Yellen is using the minutes of meetings where there is no scheduled press conference to massage expectations about monetary policy. This happened in April when the minutes revealed there was vibrant discussion about an interest rate rise in June, something that could not be gleaned from the press release itself. This consequently produced an adverse market reaction. The minutes of the July meeting, released 17 August, was arguably a major disappointment in communication, because policy intentions remained ambiguous. Financial markets viewed the coverage of the meeting as being as being predominantly dovish, and September’s meeting has,...
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...n has been using the minutes to FOMC meetings with no scheduled press conference to massage financial market expectations about policy conduct, but it has produced mixed results.
The failure of the FOMC to articulate a reaction function to economic data is the main reason why financial markets remain unclear about policy intentions.
The FOMC has lowered their assessment of the long-term performance of the US economy and terminal federal funds rate, thereby explaining its apparent dovish bias.
The experience of 2013 and 2015 when bond yields rose should not go unnoticed by investors who may be blindly accepting the continuation of low long-term interest rates.
Governments are searching for ways to stimulate their economies, thereby raising the prospect of a more synchronised global cycle, but much depends on the outcome of the next G20 meeting in China next month.