Fed Displeased With 'Biased' Directives; Markets Said to Misinterpret New Statements of Policymakers' Leaning on Rates
Federal Reserve officials have grown increasingly unhappy with the impact on financial markets of their new effort to inform the public whenever they change their view about the likelihood of near-term changes in interest rates, according to the minutes of an Oct. 5 policymaking session released today.</br></br>At that meeting, members of the policymaking group, the Federal Open Market Committee, took no action on rates but adopted a directive that was "biased" toward higher rates. That decision sparked a discussion about what has happened since the FOMC agreed at the end of last year to begin announcing such moves immediately. In the past, the adoption of a "biased" directive was disclosed only when the minutes of a meeting were released six to eight weeks later, so market participants usually paid relatively little attention to it.</br></br>This May was the first time the FOMC adopted a bias toward raising rates and announced it right away. Financial market participants reacted to the announcement, to the dismay of many of the committee members, virtually as if rates had been increased.</br></br>At the next meeting, at the end of June, the target for overnight rates was raised and the committee went back to a neutral directive-- not because another rate increase wasn't likely but because the members feared that that if they said that they were still leaning toward higher rates, the market would overreact again.</br></br>At the Oct. 5 meeting, FOMC "members observed that the recent practice of making such announcements had led to some misinterpretations of the committee's intentions and seemed to have added to volatility in financial markets," the minutes said.