Fed to Utilize Power of Words

Written By: The WealthCycles Staff

With its recent announcement that it will begin forecasting estimates of future changes in long-term interest rates as well as plans for managing its investment portfolio, the U.S. Federal Reserve seems to be adding a new arrow in its quiver of tactics to massage the monetary system and stimulate the economy. The move is also the most blatant admission to date that the Fed is in the business of interfering in free markets. But if the mere rumor of low Fed rates fed the destructive housing bubble that ended with the 2007 crash, what will the straightforward forecasting of expected low rates do to the economy?

There was a time not too long ago when the Fed was notoriously secretive about the internal deliberations and opinions of its seven-member Board of Governors and 12 regional bank presidents. As The Wall Street Journal reported:

Not long ago, central bankers considered it unthinkable to telegraph where they expected interest rates to go. In the early 1990s, the Fed didn't even disclose when it had already moved rates, why or by how much.

But over the past couple of decades, the Fed has gradually increased transparency and frequency of communications with its stakeholders. The New York Times describes the change in tactics:

Fed policy makers have
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testiomials The U.S. Federal Reserve’s plans to begin forecasting future interest rate changes gives the central bank another tool to use in manipulating markets and stimulating the economy.”

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