People generally believe that the U.S. Federal Reserve’s strength lies solely in the institution’s ability to handle money. Ultimately it is one that prints the U.S. dollar. But recently, Ben Bernanke argued that American institution has another critical power: the power of words. And when you’re president of the Federal Reserve (FED), a word can travel very far. In a speech last month, Bernanke announced the Fed will issue additional lending policies to promote a “strong” economic recovery.
After his speech, television stations specializing in economics have gone wild, suggesting that a move from Fed will come soon. How does this magic work? How do a few cryptic words manage to shake so many spirits? Joe Gagnon, a former Fed economist who now works for the Peterson Institute for International Economics, pointed out one word from Bernanke’s phrase, “strong”. Using the word “strong” he “says that recovery so far has not been strong,” notes Gagnon. “This is an indication that they feel the need to do more”.
It’s subtle, but words like this provide a signal to investors that they should not be taken by surprise when the Fed will initiate a broader movement. When trillions of dollars are at stake, surprises are not good. And as messages of the institution may seem sometimes coded, Fed is now clearer and more direct than ever in its history. Twenty years ago, the Fed did not even make public their thoughts and moves. Investors needed to follow the movement of money in the market to find out what the institution decided to do.
These days, Ben Bernanke said that the ability to communicate is one of the most powerful tools you have. For example, last year, instead of just saying that it will keep the key interest rate at a low level, the Fed announced that it expects to keep interest rates low for several years. “It had a strong impact on markets,” says Randall S. Kroszner at the University of Chicago, former member of the Board of Governors of the Fed.” And if you looked at futures markets in the short term, the interest moved only a little.”
Fed launched a new program Thursday of quantitative easing, announcing that it will pump an additional $40 billion in the U.S. economy every month, until there will be a sustained recovery of the labor market. This is seen by the markets as an unprecedented measure marking a significant expansion of the institution’s efforts to reduce unemployment in the U.S.
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