The Fed's Communication Failures This Year Are Largely Janet Yellen's Fault

Janet yellenREUTERS/Toru HanaiFOMC Vice Chair Janet Yellen

The only thing that may be more important than monetary policy itself is how it’s communicated to the markets.

For much of the year, the Federal Reserve has signalled that it would begin tapering its large-scale asset purchase program. Most economists expected the tapering to be announced at the September FOMC meeting.

That didn’t happen and the markets were shocked.

Many blame Chairman Ben Bernanke for the communications failure.

But it may actually be more appropriate to blame current Fed Vice Chair Janet Yellen, who will be nominated for Fed Chair this afternoon.

Yellen has acted as head of the FOMC’s subcommittee on communications since 2010. Just a year ago, Yellen actually gave a huge speech and presentation titled “Revolution and Evolution in Central Bank Communications.”

“Perhaps Yellen’s biggest challenge will be uniting the FOMC and tidying up its blurred policy message,” said Capital Economics’ Paul Dales. “Given that Yellen leads the Fed’s subcommittee on communications, she must take some responsibility for the recent confusion.”

“As Chair, she will need to cajole the FOMC into providing clearer guidance on when and how fast the Fed will taper and when and how fast rates will rise,” added Dales. “Since her first meeting as Chair won’t be until March, tapering may begin before she gets in the hot seat. That said, the longer the government shutdown lasts, the more likely that it will happen on her watch.”

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