Fixed-income assets have lost a lot of money in the past few months thanks to soaring interest rates. Economists at the Federal Reserve attribute this to a mixture of heightened optimism about the economy and the "perception" that the Fed has become more hawkish, according to the minutes of the Federal Open Market Committee's last meeting on June 18-19.
This suggests that there will be more bumpiness ahead. The Fed is sending so many muddled and nuanced signals that investors and analysts would be right to interpret speeches and other "communications" in any number of ways.
For one thing, the FOMC is divided in its analysis of the state of the economy. Is the slowdown in inflation because of things such as the impact of sequestration on Medicare pricing, and therefore "transitory," or does it reflect something less benign? How low does unemployment need to be before the Fed is confident that its work is done?
When should the Fed begin tapering its asset purchases? At the moment, it is buying $85 billion of bonds a month. Nobody really knows what this does, which is one reason why the Fed has been cautious about doing more. At least, that's the argument made in a recent paper by John Williams, the president of the Federal Reserve Bank of San Francisco.
Should there be publicized guidelines to help people understand what the Fed is doing? The minutes provide little clarity:
Some suggested providing forward guidance about asset purchases based on numerical values for one or more economic variables, broadly akin to the Committee’s guidance regarding its target for the federal funds rate, arguing that such guidance would be more effective in reducing uncertainty and communicating the conditionality of policy. However, participants also noted possible disadvantages of such an approach, including that such forward guidance might inappropriately constrain the Committee’s decision making, or that it might prove difficult to communicate to investors and the general public.
At a news conference last month, Fed Chairman Ben Bernanke said that the central bank would have stopped buying assets by the time the unemployment rate had reached 7 percent, although that isn't a "trigger," merely a "threshold."
Analysts have been debating whether the market turmoil has been driven by an improved employment outlook, the collapse of leveraged bets, reckless tightening by the Fed or something else. The minutes won't resolve those arguments.
It will be interesting to learn how the Fed's policymakers interpret the market action since the FOMC met. We'll get to read a sanitized summary of those discussions toward the end of August.
(Matthew C. Klein is a contributor to the Ticker. Follow him on Twitter.)