While many believe that Fed has already used most of the arrows in its quiver, and the recent data shows that economy is on a slow recovery path; significant risks still remain, particularly on account of increasing possibilities of European recession and Chinese slowdown.
In the last three years, the Fed has kept the federal funds rate at a record low of between zero and 0.25%, it has bought more than $2 trillion in government bonds and mortgage-backed securities and also taken many other rather innovative steps to boost the ailing economy.
Federal Open Market Committee (FOMC) is meeting today, last time for this year. Most market participants do not expect the Fed to announce any further rate related action like another round of quantitative easing today, as it needs to keep some of its options open in the event of a meltdown in Europe.
An important discussion in today’s meeting of the FOMC is on the details of the new communication strategy. The Fed could expand its quarterly release of the projections for economic growth, inflation and unemployment and provide guidance on its expected interest rate moves based on the economic projections.
Some believe that the best course of action for Fed is to keep the markets guessing and act as and when required, since providing clear guidance on rates may interfere with Fed’s flexibility to revise interest rates later if necessary. And there is always a likelihood of some traders making risky bets based on Fed’s guidance.
However many others believe that clear communication from the Fed about goals and plans for interest rates has a number of advantages. Most importantly it could help eliminate the kind of market volatility we have seen in the recent past
Will a more transparent and clear communication policy from the Federal Reserve help the markets?
