The Fed’s Confusing Search for Clarity

Kevin Lamarque/Reuters Jeremy C. Stein, a member of the Federal Reserve Board of Governors.

The Federal Reserve wasn’t trying to surprise investors last week, it’s just not doing a good job of communicating clearly, Jeremy C. Stein, a Fed governor, said Thursday.

Indeed, Mr. Stein said that articulating a clear plan for winding down the Fed’s monthly bond purchases was more important than the exact timing of tapering.

“Whether we start in September or a bit later is not in itself the key issue â€" the difference in the overall amount of securities we buy will be modest,” Mr. Stein said in prepared remarks for a symposium in Frankfurt. “What is much more important is doing everything we can to ensure that this difficult transition is implemented in as transparent and predictable a manner as possible. On this front, I think it is safe to say that there may be room for improvement.”

And he came prepared with a suggestion: The Fed, he said, should cut the volume of its monthly bond purchases by a fixed amount from the current level of $85 billion for each 0.1 percentage point decline in the unemployment rate.

In sharing his thoughts on the best way to achieve clarity, however, Mr. Stein is likely to have contributed to the general confusion about the Fed’s intentions. He joins a number of other Fed officials in outlining proposals for the tapering of asset purchases, leaving investors to guess which ideas may prevail - and when.

This is particularly problematic because, as Mr. Stein also explained Thursday, investors are a little jumpy at the moment. The Fed’s stimulus campaign basically rests on persuading investors to bet their own money on the proposition that the Fed will continue to suppress interest rates. It is basically a trust fall.

And investors are understandably anxious the Fed might change its mind.

“If the Fed’s control of long-term rates depends in substantial part on the induced buying and selling behavior of other investors, our grip on the steering wheel is not as tight as it otherwise might be,” Mr. Stein said. “Even if we make only small changes to the policy parameters that we control directly, long-term rates can be substantially more volatile. And if we push the recruits very hard â€" as we arguably have over the past year or so â€" it is probably more likely that we are going to see a change in their behavior and hence a sharp movement in rates at some point.”

So there you have it: Making monetary policy, as Ben S. Bernanke once explained, is like driving a car with “an unreliable speedometer, a foggy windshield, and a tendency to respond unpredictably.” And right now, Fed officials don’t have a firm grip on the wheel. And they don’t agree about which way to go.