Federal Reserve: What We Have Here Is a Failure to Communicate

Via Mark Thoma:

Economist's View: Repeat After Ben: John Berry explains the Fed's struggle to find an effective communication strategy:

Fed Officials Confront a Failure to Comprehend, by John M. Berry, Bloomberg: Five months into the term of Chairman Ben S. Bernanke term he and his colleagues haven't figured out how to get financial markets to understand what they are trying to do with monetary policy in today's volatile economic setting. It's now a foregone conclusion that the Federal Open Market Committee will raise its target for the overnight lending rate by a quarter-percentage point, to 5.25 percent, on Thursday. The issue is how to draft a statement that explains the committee's thinking that leaves it free to respond to new economic data without giving some stubborn traders the impression that the Fed is soft on inflation....

Some officials, convinced that economic growth is slowing and that inflation will settle down again soon, would really rather not raise the target this week for the 17th time in a row. Even those officials feel they have no choice because investors, shaken by recent inflation reports, fully expect them to do so....

The major concern among officials at this point is the small rise in inflation expectations shown by a variety of measures the Fed follows. Officials want to keep expectations capped....

Nevertheless, unless inflation momentum is much stronger than most Fed officials think it is, at some point soon, they are going to want to leave the lending rate target unchanged. What some traders can't seem to comprehend is that if the FOMC were to do that, it wouldn't mean that the committee might not raise the target at a subsequent meeting. A pause wouldn't mean the Fed was done....

Obviously, no one knows exactly what the policy path will be for the rest of the year, including Bernanke and his colleagues. What the officials fervently hope is that they can find the right words to persuade the markets to leave them free to analyze incoming economic data and make their policy decisions accordingly...