Fed Gov. Stein: Fed Faces Challenges in Communicating
“The market”—a conglomeration of people and institutions with varying opinions and goals—is not a single, rational person. And the Federal Open Market Committee (FOMC) must consider that reality as it communicates about monetary policy, Federal Reserve Governor Jeremy Stein said in a recent speech at New York University.
Stein said that before joining the Fed, he did not fully appreciate the complexities of communicating about monetary policy. One of the most important communications challenges involves the FOMC’s “delicate interplay” with financial markets, Stein said. A critical part of that interplay is realizing that market prices reflect the interaction of many actors, not the beliefs of one actor.
Why did Treasury yields jump last year?
But the market reaction seemed curious, Stein said. According to the Survey of Primary Dealers by the New York Fed, there was little change during this period—May and June 2013—in the expectation of the median respondent as to the ultimate scale of the asset purchases. Thus, Stein concluded, the FOMC communications were not apparently "meaningfully hawkish."
Then why did Treasury yields rise from about 1.6 percent to 2.7 percent in just two months? One theory holds that there was a wide divergence of views among market participants about the future of QE, Stein noted.
“In particular, however reasonable the median expectation, there were a number of ‘QE-infinity’ optimists who expected our purchases to go on for a very long time,” Stein explained. “And, crucially, in asset markets, it is often the beliefs of the most optimistic investors—rather than those of the moderates—that drive prices, as they are the ones most willing to take large positions based on their beliefs.”
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