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The U.S. Federal Reserve' s surprise decision on delaying the taper of its bond purchases will damage their ability to communicate with and get consensus in the marketplace, economists said here Friday.
"I could see the argument for not wanting to taper QE (quantitative easing) given what' s going on in the economy, given the fiscal drag. But they didn' t guide expectations in the market place. They shocked the marketplace. I think that undermines their ability to communicate with the marketplace in the future,"said Mark Zandi, chief executive of Moody' s Analytics, at the 2013 World Leadership Forum held by Foreign Policy Association.
"That' s a big problem for them because their most powerful tool for managing interest rates going forward is forward guidance that depends critically on their ability to communicate with market,"Zandi said.
The Fed on Wednesday surprised the markets by delaying the long-debated tapering of its current monthly 85-billion-U.S. dollar bond buying program, citing concerns over tighter financial conditions and fiscal headwinds, leaving the actual wind-down of the monetary stimulus down the road.
Steven Wieting, global chief investment strategist and managing director at Citi Private Bank, said at the forum that people arguing about whether they predicted the Fed' s decision right or not don' t really matter very much now.
"But the ability to communicate and get consensus here in policy going forward is very important,"he noted.
"And next time when they really want to make a change in policy, I think it will be harder to get consensus in markets and may end up being a bit more disrupted in markets,"Wieting said.
Criticizing the Fed' s inconsistency, Kansas City Fed President Esther George, the lone dissenter on Wednesday' s policy decision, said Friday the central bank' s decision to keep its quantitative easing intact"created confusion, created a disconnect."
The Fed"will also have to think about the challenges that come with issues of credibility and the predictability of policy actions," George said when addressing the Shadow Open Market Committee on the economy.
"The decision on tapering this week was a surprise partly because the Fed was starting to express somewhat greater concern about the unemployment rate,"J.P. Morgan Chief Economist and Managing Director of Global Research Bruce Kasman said at Friday' s forum.
Fed Chairman Ben Bernanke drafted a timetable for the"exit"plan following the central bank' s June meeting, saying the Fed would reduce the pace of purchases in measured steps if economic conditions continued to develop broadly as anticipated, and would conclude the purchase program around mid-2014, when unemployment rate is expected to be in the vicinity of 7 percent.
The U.S. unemployment rate went down three-tenths of a percentage point from June to August (from 7.6 percent to 7.3 percent),"but the Fed backed away from tapering and even backed away from the message about the unemployment rate,"Kasman said, noting the Fed has an inconsistency in communication.
However, Kasman stressed that the taper"is a huge issue for not the economy' s performance over the next two or three quarters, but the economy' s performance over the next three to five years."
Despite the Fed' s delay to announce the widely-expected taper, Zandi said he remains optimistic and believes the central bank will be able to land the plan roughly on the timeline.
