Nevertheless, I don’t see LSAPs as being part of the FOMC’s toolkit once we leave the zero bound behind us. We’re still much less certain about their effects than we are about the effects of changes in the federal funds rate. According to Brainard’s classic analysis, the more uncertain you are about the effects of a policy tool, the more cautiously you should use it. Instead, you should rely more on other instruments in which you have greater confidence…

That said, I expect that the explicit link between future policy actions and specific numerical thresholds, as in the recent FOMC statements, will not be a regular aspect of forward guidance, at least when the federal funds rate is not constrained by the zero lower bound… [S]uch communication is difficult to get right and comes with the risk of oversimplifying and confusing rather than adding clarity. Therefore, in normal times, a more nuanced approach to policy communication will likely be warranted. I see forward guidance typically being of a more qualitative nature, highlighting the key economic factors that will affect future policy actions. Of course, if we again find ourselves in a situation where conventional policy has reached its limits, then we will have the ability to return to more explicit forward policy guidance to provide additional monetary stimulus.

[This] form of forward guidance—pre-commitment to a policy rate path—could create more risk for the central bank. In particular, consider a scenario in which the central bank decided to increase monetary accommodation by committing to maintain a low short-term interest rate for a long time even if this commitment resulted in inflation overshooting the central bank’s objective in the future.

This is not a policy that has been adopted by the Federal Reserve. There are implementation challenges with this approach. In particular, it is difficult for a monetary policy committee today to institutionally bind future monetary policy committees to follow actions that could conflict with their objectives in the future. Without such a credible forward commitment, such policies would likely be ineffective in affecting expectations in the manner needed to provide additional monetary policy accommodation.

The September decision not to reduce purchases clearly took some market participants by surprise. For me, the decision was a close call, and I would have been comfortable with a small reduction in purchases. However, as the minutes of the September FOMC meeting reflect, there were legitimate concerns about the strength of incoming economic data, the economic effects of tighter financial conditions and of tighter fiscal policy, and the prospect for disruptive events on the fiscal front.7 I supported the decision as a reasonable exercise in risk management. Events since the September meeting suggest that the concerns regarding fiscal matters were well founded.

I would like to push back against the narrative that the decision at the September meeting has damaged the Committee's communications strategy. In its communications, the Committee seeks to influence market conditions over the medium term in a way that is consistent with its policy intentions… [A]t the end of the day, my own judgment is that market expectations are now better aligned with Committee assessments and intentions.

The September decision underscored the Committee's intention to determine the pace of purchases in a data-dependent way based on progress toward our objectives. Moreover, the modest net tightening in financial conditions since the June meeting has likely reduced the prevalence of highly leveraged, speculative positions. I believe that the market is now prepared for a reduction in purchases when the economic outlook and the broader situation support it.

Short term rates have fallen back since the September meeting, and are now better aligned with the Committee's forward rate guidance. This is particularly important because, as the Chairman stressed in September, the Committee views rate policy as its stronger and more reliable tool.

Fed Governor Jerome Powell acknowledged financial markets had been surprised when the central bank opted not to taper its bond purchase program last month, and conceded there had been a prolonged silence from policymakers ahead of the decision.

"It is fair to point out that there weren't many major policy speeches in the last couple of months leading up to the nomination of Janet Yellen for the chair," he said in response to a question. "So there was a time there when the leadership wasn't speaking."

As reported by Reuters News

The aims of the Federal Reserve’s monetary policy are full employment and price stability. These goals are set down in law by Congress. In plain English, that means that there should be enough jobs for everyone and your paycheck should hold its value. These are laudable goals that I think everyone can support.

But there’s a lot of noise around monetary policy and our intent can get lost in the ruckus. And when we don’t explain what we’re doing and why, I’m afraid the “MSU principle” can take over. That is, people will just “make stuff up.” So we at the Fed have been making a concerted effort to bring greater clarity and transparency to the discussion.

I do not mean to imply that the communications and signaling issues of the last few months have not been difficult, for many. Without question, there are difficulties inherent in communicating a data-contingent policy – but a data-contingent policy is far preferable to the alternatives. The Federal Reserve will continue to refine its policy-related communications, but I would just point out that predictive certainty will never be the case when policy is rooted in actual incoming data, which may or may not follow forecasts.

Credibility requires consistency, over time, between a central bank's statements and its actual subsequent actions. A central bank's statements will have greater immediate effect on the public's expectations the more they are seen as limiting the central bank's future choices. Yet there are likely to be circumstances, ex post, in which the central bank feels constrained by past statements. Yielding to the temptation to implicitly renege by reworking decision criteria or citing unforeseen economic developments may have short-term appeal, but widely perceived discrepancies between actual and foreshadowed behavior will inevitably erode the faith people place in future central bank statements. So central banks face an ex ante trade-off, as well, between the short-run value of exercising discretion and the ability to communicate effectively and credibly in the future.

“Costly steps had been taken to begin to prepare markets for an adjustment in the pace of asset purchases,” George said today in a New York speech to the Shadow Open Market Committee, a group of economists that critiques Fed policy. “This week’s decision by the Fed to taper expectations and not bond buying surprised many, disappointed some like me.”

…

“Signaling future policy and then failing to follow through could erode the policy intent,” George said. “Asking the markets to trust forward guidance is going to require a great deal of credibility,” she said, referring to the Fed’s strategy to guide expectations about future bond purchases and interest-rate increases.

In light of this cumulative progress, the FOMC concluded at our June meeting that the criterion of substantial improvement in the outlook for the labor market might well be met over the subsequent year or so. Accordingly, the committee sought to provide more guidance on how the pace of purchases might be adjusted over time.

The committee anticipated in June that subject to certain conditions it might be appropriate to begin to moderate the pace of purchases later this year, continuing to reduce the pace of purchases in measured steps through the first half of next year and ending purchases around mid-year 2014. However, we also made clear at that time that adjustments to the pace of purchases would depend importantly on the evolution of the economic outlook; in particular, on the receipt of evidence supporting the committee's expectation that gains in the labor market would be sustained and that inflation is moving back toward its 2 percent objective over time.

At the meeting concluded earlier today, the sense of the committee was that the broad contours of the medium term economic outlook, including economic growth sufficient to support ongoing gains in the labor market and inflation moving toward its objective, were close to the views it held in June. But in evaluating whether a modest reduction in the pace of asset purchases would be appropriate at this meeting, however, the committee concluded that the economic data do not yet provide sufficient confirmation of its baseline outlook to warrant such a reduction.

Well, I think part of the {financial market} reaction we've seen, I mean, comes from a number of sources. Part of it comes from improved economic news. And that's part of the reason why rates have gone up in other countries, as well as in the United States. And that -- to the extent that tighter financial conditions reflect a better outlook, that's a good thing. That's not a problem at all.

Part of it reflects views about monetary policy, in that -- that we want to make sure we get straight. And that's why -- to answer the earlier question again -- it's why communication is so important. We need to explain as best we can how we're going to move and on what basis we're going to move. It's much more difficult today than it was 20 years ago, because the tools are more complex, they're less familiar. But that's still very important.

I think the other factor which was at play was an unwinding of excessively risky and leveraged positions in the markets, and insufficiencies of liquidity in some cases meant that those unwindings led to larger reactions in prices and rates than might otherwise have occurred.

Now, the tightening associated with that is to some extent unwelcome, but on the other hand, to the extent that some of the riskier, more levered positions have been eliminated, I think that makes the situation more sustainable and reduces, at least, the risk that there will be an over-strong reaction to further announcements.

So we will do our best to communicate clearly. That is our goal and our objective. The more clearly we communicate, the better the chance that markets will understand our intentions and that we can avoid any -- any sharp movements. But, again, we're dealing with tools that are less familiar, harder to quantify, and harder to communicate about then the traditional funds rate.

In terms of press conferences, I think it's important to say that there's an understanding in the committee that we've had for a while that there are eight, quote, "real" meetings every year, that every meeting is a meeting in which any policy decision can be taken. And should anything occur at a -- at a meeting without a scheduled press conference that requires additional explanation, we certainly could arrange a public, on-the-record conference call or some other way of answering the media's questions.

In response to a question about the reasons for the back-up in interest rates:

There are essentially three reasons why we've seen some increase in longer-term rates, although, I would emphasize they remain relatively low.

The first is that there's been some better economic news. As investors see brighter prospects ahead, interest rates tend to rise. For example, we saw a relatively good labor-market report, which was accompanied by a pretty sharp increase in interest rates on that day.

Second reason for the increase in rates is probably the unwinding of leveraged, and perhaps successfully risky positions in the market. It's probably a good thing to have that happen, although, the tightening that's associated with that is unwelcome. But at least a benefit of it is, is that some concerns about building financial risks are mitigated in that way, and probably make some FOMC participants more comfortable with using this tool going forward.

The third reason for the increase in rates has to do with Federal Reserve communications and market interpretations of Fed policy. We've tried to be very clear from the beginning. And I've reiterated again today that we've not changed policy.  We are not talking about tightening monetary policy. Merely, we've been trying to lay out the same sequence which I just described to you about how we're going to move going forward, and how that will be tied to the economy. But I want to emphasize that none of that implies that monetary policy will be tighter at any time within the foreseeable future.

In my view, rather than try to maintain discretion, policymakers would achieve better economic outcomes and greater clarity by taking a systematic approach to policy. But how do we get there from here? I think we could vastly improve policy going forward by doing three things, which would begin to normalize monetary policy.

• The first step is to wind down our asset purchases by the end of the year in a gradual and predictable manner. As I said, I see little if any benefit from these purchases, and growing costs.
• The second step is for the FOMC to commit to its forward guidance on the fed funds rate path, that is, to begin treating the 6.5 percent unemployment rate and the 2.5 percent inflation rate in the guidance as triggers rather than thresholds.
• The third part of the strategy is to provide information on how our interest rate policy will evolve after the trigger is reached. A commitment to a robust policy rule, perhaps consistent with the way policy was conducted prior to the crisis, would provide needed clarity on how the Committee intends to vary its policy in response to changes in economic conditions.

These steps form part of a systematic approach to policymaking. They embody clarity and commitment. By helping the public and market participants form more accurate judgments about the future course of policy, systematic policymaking can improve the efficacy of monetary policy.

One influence on the FOMC “that is really hurting” may have been the timing of quarterly press conferences, Bullard said. The committee may feel obligated to make major changes in policy only during meetings when there is a press conference rather than at any meeting, he said. “I have urged the chairman to change that policy” and hold media briefings after each meeting, he said. “I think it is an important limit and it is a bureaucratically imposed limit.”

In August 2011, the Committee began using dates to signal when the policy rate might increase, but it changed those dates at subsequent meetings. The FOMC then opted to formulate its forward guidance in terms of thresholds for unemployment and inflation. This is preferable to calendar dates because it is state contingent. Yet, the FOMC has specifically said that the thresholds are not triggers — they are not firm commitments and they may change. The Committee has repeatedly opted for language that allows a great deal of discretion to behave as it chooses, depending on the circumstances. But effective forward guidance demands commitment. When the Committee stresses the general flexibility of its policy decisions or makes vague references to data dependency, it does little to clarify the FOMC's intentions about future policy, even though clarity is what the FOMC wants to provide to the markets through its forward guidance. Thus, there is a fundamental tension between wanting to provide clarity as to the forward course of policy and wanting to maintain complete discretion. The Committee has failed to address this tension, which undermines the effectiveness of its policy.

I would add that this tension is not new. The Committee has typically preferred discretion over systematic policy. Yet, in normal times, the conduct of policy was more predictable and the public had come to expect policy to play out in mostly understandable ways. Since the crisis, the old "rulebook," so to speak, has been thrown out, but we haven't replaced it with anything except some vague promises that have changed over time. This naturally leads to a lack of clarity in the eyes of the public and undermines the effectiveness of the forward guidance the Committee offers.