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The Reformed Broker

The Fed's new openness policy will create confusion, not clarity

Economists think that the Federal Reserve's new policy to be more transparent will only create noise and confusion in the markets

By Joshua M. BrownGuest blogger / January 4, 2012

In this file photo, Federal Reserve Chairman Ben Bernanke listens to a question during a town hall meeting for soldiers and their families in El Paso, TX. The Federal Reserve has unveiled a plan to be more transparent, a policy that many economists think will only create more confusion in the financial markets.

Rudy Gutierrez/AP/El Paso Times/File

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UBS economists Maury Harris and Drew Matus address the new "openness" of the Fed and their desire to become more transparent with interest rate actions.  The concept gets a thumbs down on the grounds that it will probably be yet another noisy, misleading thing to disrupt markets:

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Joshua has been managing money for high net worth clients, charitable foundations, corporations and retirement plans for more than a decade.

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More on Fed’s communications policy. In addition to the new estimates the Fed also noted that it would release “[A]n accompanying narrative will describe the key factors underlying those assessments as well as qualitative information regarding participants’ expectations for the Federal Reserve’s balance sheet.” This adjustment to Fed communications is unlikely to be the last. The minutes show that “[a] number of participants suggested further enhancements to the SEP; the Chairman asked the subcommittee to explore such enhancements over coming months.”

We believe Fed officials publishing their expectations for the timing of the first rate increase could increase market volatility as differences between the members’ economic forecasts and actual figures that do not impact the projected policy path may confuse market participants. The Fed acknowledges these risks but views these concerns as “manageable.” We view the step as making the Fed more transparent while not doing much to improve clarity.

Elsewhere, this new transparency is being likened to a form of QE3 in disguise says UniCredit and JPMorgan (via Pedro da Costa at Reuters).

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