Communication Breakdown: Tense Negotiations Inside the Fed Produced Muddled Signals to Markets
The Federal Reserve's decision to continue one of the most audacious experiments in monetary history -- an $85 billion-a-month bond-buying program designed to boost growth -- followed six months of tense negotiations inside the central bank, and a stumbling effort to let the public know what was going on.</br></br>A small group of Fed officials has been privately pushing Fed Chairman Ben Bernanke to plan an exit from his signature program, said several people familiar with the closed-door deliberations. But glimmers of a weakening economy prompted the Fed in September to keep the program going -- surprising markets primed by months of central-bank suggestions that a wind-down was nearing.</br></br>The saga shows how hard it is for a central bank to communicate about plans that are complicated, evolving and conditional on the economy. Fed officials regard programs designed to sway long-term interest rates as essential to the fragile economy -- tools for stimulating consumer spending, investing and home buying. Mr. Bernanke has long argued that being more transparent will make such policies more effective.</br></br>The Fed's efforts to telegraph its strategy left investors confused at key points about where it was heading, and some misread Mr. Bernanke's intentions about the bond-buying program and interest rates. That disconnect exacerbated a real-world problem: rising rates that by August showed signs of denting a budding housing recovery.</br></br>At present, the Fed has laid the groundwork to start reducing its bond purchases later this year or early next year. But that depends on how the economy weathers another recent soft patch, which has been complicated by feuding between Congress and the White House over fiscal policy. More clues will appear Wednesday when the Fed releases minutes of its Sept. 17-18 meeting.