The Fed might be ambiguous, but at least they’re honest

In their initial statement from the January 27-28 policy meeting, the Fed hinted at a midyear rate hike. However, the minutes from the meeting were far less convincing, as there was much difference in opinion about the timing of a rates hike amongst Fed officials. “’It was suggested that the [Fed] should communicate clearly that policy decisions will be data-dependent, and that unanticipated economic developments could therefore warrant a path of the federal funds rate different from that currently expected by investors or policy makers,’ the minutes said. In other words, the Fed could move faster or slower on rate increases depending on the economy’s performance,” according to the WSJ.

In the Wall Street Journal, Charles Calomiris and Peter Ireland crafted a response to the Fed, entitled “A Muddle of Mixed Messages from the Fed.” In the article, they lay out some instructions for the Fed:

“First, stop giving mixed signals reacting to each day’s data dump. The Feb. 6 jobs report, for example, confirmed the positive outlook for “solid” economic growth and “strong” job gains that was described in the Jan. 27-28 FOMC policy statement. Yet recent speeches and media appearances by Fed Chair Janet Yellen and Federal Reserve Bank Presidents Charles Evans and Narayana Kocherlakota convey an impression that the economy and labor markets may not be healthy enough for a midyear rate hike.

Their statements may be part of an effort to maintain Fed flexibility, but they confuse markets. Far better to emphasize the compelling indicators that point to sustained economic growth. For example, while the GDP report for the fourth quarter of 2014—2.6% annual growth—was slower than the previous two quarters, it was still solid. The job market is stronger than it has been in years, and so are the data for consumption and housing starts.”

Yes, the Fed’s statements are ambiguous, and they do maintain flexibility, but what Calomiris and Ireland don’t address is that they actually have some validity! If the Fed came out and said that the labor market was great and everything is peachy, that would just be irresponsible. If the Fed only addressed the positive gains in unemployment, they would only be reporting half the story. What do Calomiris and Ireland have to say about wage growth? Is the Fed supposed to ignore those concerns, and allow the markets to react under false pretenses? What they are suggesting is false advertising, and that cannot be the backbone of any good product.

One thought on “The Fed might be ambiguous, but at least they’re honest

  1. KT Lee

    Agree with your point on the Fed’s act. Its statements were obscure and posed uncertainty about the future. I understand that the Fed is doing its best to maintain the national growth, but feel that it should do better than that. Every little decision and announcement made by the Fed are watched by all the other nations because America is the most leading, influential nation in the world.

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