The two components of monetary policy, forward guidance and the asset purchase program are viewed by the markets "as tied closely together," while the Fed sees them as separate, according to Federal Reserve Bank of St. Louis President and CEO James Bullard, who said Friday the Fed needs to figure out how to sync the two perceptions.
"Both views have some merit," he said.
However, "The Committee needs to either convince markets that the two tools are separate, or learn to live with the joint effects of tapering on both the pace of asset purchases and the perception of future policy rates," Bullard told the Financial Forum in St. Louis, according to a release by the Fed.
Financial markets interpreted the Federal Open Market Committee's June "roadmap" for tapering, which anticipated a reduction in asset buys in the Fall, as "relatively hawkish," while the September decision to put off tapering was seen by the markets as "relatively dovish."
"The 'financial markets signature' from the unexpected changes in the policy stance at the June and September FOMC meetings showed that asset purchases are very effective," Bullard said. He explained that key variables, including the real interest rate, the exchange rate, equity prices and expected inflation, moved significantly and in the conventional direction following these announcements. "This demonstrates that changes in the pace of asset purchases have a very similar financial market effect as changes in the policy rate during more 'normal times,'" Bullard said.
