Market receives mixed signals from the Fed
It was never a guarantee that the Federal Reserve would pull back on its bond-buying program in September, but it failed to communicate all of the lingering possibilities, a writer for the Wall Street Journal claims. Fed Chairman Ben Bernanke seemed to have set aside the plan he laid out in June, making it even less clear when the program will end. Per The Wall Street Journal:
Fed officials place heavy weight on communicating clearly to investors how they're likely to behave. They believe that guiding the public about the Fed's future actions influences spending and investing decisions in the present, making monetary policies more effective in helping the economy. Part of the Fed's strategy, for instance, is to assure the public that it will keep short-term interest rates low for several years and that its bond-buying program will be in place as long as the economy needs added support—signals aimed at holding down long-term interest rates to boost growth.
But when put into action, the Fed has fallen short.
But the events of the past months and Wednesday's market reaction show the potential pitfalls when Fed communications on monetary policy—the so-called forward guidance—are conditional, complicated, nuanced or misread by much of the investing public.