Markets & Stocks
Markets spinning on Fed's words
A central banker admits he guessed wrong at the market's reaction to the Fed's moves.
August 28, 2003: 2:24 PM EDT

NEW YORK (CNN/Money) - While Alan Greenspan's speeches may be void of exhilaration, the markets' recent sharp swings following his words have left some policy makers in the dark about investors' reaction.

Some central bankers, including William Poole, president of the St. Louis Federal Reserve, have guessed wrong about the markets' reaction to the Fed's actions and words, according to a report in the Washington Post.

"My personal experience is that I find it exceedingly difficult to predict how people will interpret policy actions and the nuances of the press release," Poole said in a recent speech, the paper reported.

The difficulty in anticipating reactions has left the bond market, holders of mortgage-backed securities, and homeowners looking to refinance with a whiplashed feeling, which began in the weeks leading up to the Fed's May 6 meeting, the paper indicated.

Before the meeting, several Fed officials, including Greenspan, spoke about the remote possibility of deflation, or falling prices.

With the Federal funds rate already at historic lows, the policy makers stressed that even if they lowered the target on overnight interest rates to zero, they still could infuse the economy with money by buying longer-dated interest securities, which would push rates lower.

When the Fed met May 6, it left interest rates unchanged at 1.25 percent and expressed its concern with recent economic figures.

Related stories
Clarity please, Mr. Greenspan
Fed holds rates steady
The wait-and-see Fed

This gave investors the indication the Fed was "running out of room" to cut rates, Poole said. This sent Treasury rates plummeting in anticipation that the Fed may begin to buy government debt.

However, the process reversed itself at the Fed's next meeting on June 25, when it cut rates by 25 basis points (one-quarter percentage point) to 1 percent. Investors then stopped believing the Fed would buy Treasurys, sending rates soaring, Poole said, according to the Post.

Although the bankers said in July that they would hold rates at low levels for as long as needed, the markets had taken their own directions.

For more on bonds and rates, click here

"Had the Fed cut rates by a half-point in June, and Alan Greenspan made a statement in June like he did in July ... the market really would have gotten the message" that rates are likely to remain low for a long time, Alan Blinder, an economist at Princeton and a former Fed vice chairman, told the paper.

"What this illustrates is the virtue of being more plain-spoken and the dangers when you are not," Blinder said.  Top of page

  More on MARKETS
The three biggest risks to global investors
Trump suggests car imports may be the next target for tariffs
Victoria's Secret customers are buying bras online ... and that's a problem
Trump suggests cars may be the next target for tariffs
Deutsche Bank is cutting more than 7,000 jobs
Tiffany's booming sales send its stock soaring

graphic graphic