Illustrating the commitment to greater communication, Bernanke indicated in a speech last week that the economic outlook had deteriorated, with the housing slump and credit crunch spilling over to damp consumer spending and employment. Bernanke’s position seemed to indicate the Fed would cut interest rates by half a percentage point by the end of the month.
Fed officials are unlikely to cut rates before their meeting scheduled for January 29-30, because Bernanke’s speech has already essentially recalibrated expectations about the market. Still, analysts say this could change abruptly in the event the outlook worsens sharply in the next several days.
The Fed’s new communications strategy comes after many months during which the bank was criticized by Wall Street analysts, academics and some former Fed officials for repeatedly implying it wouldn’t cut rates further, and then doing just that, and for sending other contradictory signals. Some Fed insiders shared those concerns.
About the Fed’s approach, Stephen Stanley, chief economist at RBS Greenwich Capital, a bond-trading house, says “They’ve more or less gotten to the right place [with policy]. They’ve just been erratic in getting there.” Stanley notes that in official statements and speeches, the Fed “has been kind of swinging from one extreme to the other....It’s hard to parse out a center of gravity.”
Fed officials reject the criticisms but do acknowledge it has been hard to deliver a consistent message because, says Fed Vice Chairman Donald Kohn, “the situation has been so fluid and so uncertain in its effects.”
At this point, Bernanke or Kohn will likely address the economic outlook in public at least once between policy meetings as long as the economic outlook remains unsettled.