Part of the problem has been muddy economic data that do not provide a clear signal of where the recovery is headed. The Fed also has left itself plenty of wiggle room to interpret the data.
In fact, there is an unusual level of disagreement even among top Fed officials over how to read the economic data and what that means for its stimulus efforts, rattling markets even more.
The Fed is led by a board of seven governors based in Washington and 12 reserve bank presidents from districts across the country. The influential policy-setting committee consists of the governors and a rotating cast of four reserve bank presidents. For decades, open disagreement among officials was frowned upon under the tight leadership of Alan Greenspan.
Chairman Ben S. Bernanke, on the other hand, has welcomed debate among members as part of the central bank’s move toward greater transparency. That has given them more opportunities to influence the market, for better or for worse.
San Francisco Fed President John Williams interpreted the recent data as showing a rosier economic picture that could allow the central bank to begin dialing back its monthly bond purchases as soon as this summer. St. Louis Fed President James Bullard is less confident about the recovery but suggested bond purchases should continue because he is worried about the data on inflation. New York Fed President William C. Dudley said any reductions will be made slowly and carefully, while Richmond Fed President Jeffrey Lacker said the central bank should stop the program right away, cold turkey.
“It creates this background of inconsistent messages,” said Lou Crandall, chief economist at the research firm Wrightson ICAP. “The longer we’ve got to live with this constant drumbeat, the worse it’s going to get.”
Even Bernanke has gotten caught up in the dating game. In prepared congressional testimony last month, the chairman warned of the dangers of ending the Fed’s stimulus efforts too early in the recovery. But when pressed by lawmakers, he acknowledged that the Fed could begin to reduce its bond purchases in its next few policy meetings.
Bernanke has tried to cast any reduction as less stimulus, but that would not necessarily mean the Fed is ready to take its foot off the gas pedal. Markets do not seem to be buying the line. Official Fed communications have tried to emphasize that the central bank has the flexibility to respond as economic data roll in, and the policy statement slated for release Wednesday is likely to make the same point.
The question remains whether the markets are willing to listen.
“This kind of flexibility means more uncertainty,” said former Fed governor Larry Meyer, who now heads the consulting firm Macroeconomic Advisers.