Economics Today 18th Edition by Roger LeRoy Miller

Exercise 1

The Fed Struggles to Communicate Its Policies
Securities traders know that open market purchases associated with Fed quantitative easing tend to push up bond prices and tend to push down interest rates. Traders also know that open market sales will tend to reduce bond prices and lead to higher interest rates. Thus, these traders pay close attention to signals of future Fed policies imbedded in Fed officials' pronouncements. Nevertheless, after months of Fed statements that traders thought signaled an end to quantitative easing, the Fed unexpectedly continued the quantitative easing policy. A headline summed up the reaction: "In Bid for Clarity, Fed Delivers Opacity."
In an effort to improve fed policy communications, the Fed chair resorted to using metaphors-figures of speech meant to suggest similarities. In this respect, he sought to follow the example of previous Fed chairs, such as William Martin, who in 1955 said that the Fed's duty was to "take away the punch bowl just as the party gets going." Unfortunately for the chair of the Fed, his metaphors failed to communicate Fed policy intentions very clearly. Traders were not quite sure what he meant, for instance, when he said, "We're going to be shifting the mix of our tools as we try to land the ship in a smooth way onto the aircraft carrier." Then he said that the Fed's quantitative easing effort was "akin to letting up a bit on the gas pedal as the car picks up speed" but the interest rate effect would be like "beginning to apply the brakes." Afterward, many traders indicated that they remained deeply confused about the Fed's plans.
Why are future Fed policy intentions, such as those communicated by today's Fed chair, Janet Yellen, of particular interest to securities traders?