Communications Key as Fed Prepares Raise Rates, Ex-Official Stein Says

        By Ben Leubsdorf
        BOSTON--How the Federal Reserve talks about raising interest rates could be more significant than the U.S. central bank's actual decision to raise rates, former Fed governor Jeremy Stein said.
        "How you manage the communication about a given amount of tightening or change in policy may be more important than the change itself, sometimes, " Mr. Stein said Saturday during a panel at the American Economic Association's annual meeting in Boston.
        Mr. Stein, a Harvard University economist, stepped down in May 2014 after serving two years on the Fed's Board of Governors.
        As the economy heals from the 2007-2009 recession, Fed officials are preparing to raise interest rates that have been pinned near zero since December 2008. Most officials at the central bank expect the first rate increase will come sometime this year, though the precise timing and pace remain up in the air.
        Mr. Stein pointed to lessons from the Fed's experience winding down its bond-buying program, which was intended to further stimulate growth. When officials signaled in mid-2013 they might soon begin to reduce the pace of bond purchases, financial markets reacted sharply in what became known as the "taper tantrum."
        But the ride was calmer once the Fed began, in December 2013, to reduce its purchases by $10 billion per meeting. The program ended last October with little fuss.
        "One thing that the tapering episode made very, very clear is that there's the direct effect of policy, and then there's the signal content of policy about future reaction functions," Mr. Stein said. "So on the one hand, the first steps toward tapering were incredibly laden with information and there was a lot of market volatility, and then once it was essentially put on autopilot at $10 billion a month, the actual quantity of bond purchases went to zero without any real further market reaction or any tightening. In fact, financial conditions were going in the other direction."
        Mr. Stein didn't comment Saturday on the potential timing or pace of Fed rate moves.
        (END) Dow Jones Newswires

        January 04, 2015 10:05 ET (15:05 GMT)

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