The Fed has stated intentions to be clearer in its communications and it has been successful with that from a broader perspective. But details of the fixed data are still confusing and the Fed is searching for a new approach.
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The Fed hopes its reiterations about keeping interest rates low for as long as necessary to boost job growth will also keep long-term rates low, boosting spending and investment.
The Fed has spent a great deal of time considering the best way to communicate its intentions.
Fed officials see communications as particularly important in a lackluster economy.
Fed minutes from the September meeting show the decisions to move forward with a third quantitative easing (QE3) are part of an overall revamp of Fed policy currently being considered.
The Fed has been conscious of the effects of its communications with the public since 1994 when it began announcing the policy decisions made at the Federal Open Market Committee (FOMC) meetings.
Under a new communications policy, the Fed might state that it intends to keep short-term interest rates low until the unemployment rate drops to a specific level.
But the Fed is also aware that such specific statements can backfire. Public perception could interpret the statement as evidence the Fed is excessively worried about the economy’s health.
That would be a negative instead of a restoration of investor confidence.
But keeping rates low for an extended period of time reflects the Fed’s intention to support economic growth over the long term, not that it expects the economy to remain week until mid-2015.
Most FOMC members agree that specific numerical thresholds will provide greater clarity about the conditionality of the Fed’s guidance. But the communications challenges
show the need for further work in its communications about its intentions.