The Federal Reserve's forward guidance has been – and will continue to be – "a mistake", according to one participant in a Central Banking On Air debate on the Fed's post-crisis policy.
Andrew Smithers, founder and chairman of Smithers & Co, argued that "silence is often golden" and central banks "do not seem to appreciate that" any more. "They should say they are data dependent and then they should shut up," he said.
In December 2012, the FOMC tied the federal funds rate to the unemployment rate with the introduction of ‘numerical thresholds', and in June this year signalled it would consider reducing the pace of its asset purchases when the labour market showed "substantial" signs of improvement.
Richard Portes, a professor of economics at London Business School, said the Fed's guidance was "to some degree badly communicated", and pointed to the market's seeming inability to distinguish between when and why the Fed will increase the federal funds rate or cut back its asset purchases.
He was nonetheless bewildered by markets' inability to grasp the importance of incoming data to the Federal Open Market Committee (FOMC) decision-making process.
The FOMC shocked markets on September 18 when it pledged to continue buying $85 billion worth of assets each month. Most analysts had been predicting a reduction – a ‘Sep-taper' – of $10 billion–$20 billion.
Committee members were, however, unimpressed by recent data in the labour market. Dominic Bryant, an economist at BNP Paribas, acknowledged that labour market data "had been on the soft side" and said this was a "sign of what was coming".
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