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What is the Fed Feeding us? Truth or Lies?

Communication is key. The Fed didn’t always understand that, but over the years they’ve learned that communication and transparency are important to anyone affected by their policy decisions.

Before the early 1990s, the Fed didn’t even announce when they had made a policy change. That made it much more difficult for Fed watchers to decipher what they did, much less what their intentions were.

In past Fed minutes, former Fed chair Alan Greenspan joked about increasing transparency in policy announcements, and the lack thereof in their participation in the coupon market. Another Fed official joked: “The more transparent you get, the more everybody wants.

But today, the Fed is more transparent than ever.

In 2005, the Fed decided to release meeting minutes after three weeks instead of six. They also decided they should be more forthcoming about what will drive policy changes, and the expected timing of those changes.

The curtain has been pulled back to reveal who is pulling the levers and why. However, the more transparent they get, the more they seem to lose some credibility…

Now that the wizards of monetary policy are more exposed than ever, second-guessing what the Fed will do has become one big game of pin-the-tail-on-the-chairman with the financial media.

But for those of us who read between the lines, it’s also become something of an art — a careful quest as to what they really mean. When the Fed says they’re being transparent, they only mean they’re carefully feeding us what they want us to eat.

The Fed wants us to believe that they are making decisions that will shape the future based on their carefully-thought-out economic forecasting models — not reacting in response to current conditions or data (i.e. flying by the seat of their pants as economic news paints a ghastly picture).

What we know now is that the Fed does change policy because of changing data and flawed modeling.

Read the rest of this post at Economy and Markets. View original post.

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