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Is the Fed's 'forward guidance' just a source of confusion?

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The market's shocked reaction to the Fed's decision not to taper last week has raised concerns over the bank's ability to communicate with investors, according to research house Capital Economics.

"The communication difficulties which both the Fed and the Bank of England have experienced in recent months - and the easier time which the European Central Bank and the Bank of Japan have had - suggest that simpler policy frameworks may be more effective," said Andrew Kenningham, senior global economist at Capital Economics.

Since June, the Fed has maintained that it would only reduce the pace of its asset purchase program if the U.S. economy was strong enough to withstand it. The bank set thresholds, namely that unemployment would need to fall to 6.5 percent, while inflation would need to rise at a pace of 2.5 percent.

(Read more: Why prospect of Fed taper is looking more distant)

However, although U.S. auto and home sales have surged in recent months and employment has showed slow but steady growth, the improvement was not enough to convince the central bank to push ahead with its tapering plan. Markets were astounded at the 'no taper' decision, given many expected that a $10-20 billion taper was more or less a certainty.

According to Kenningham, this form of guidance, where policy moves are tied to a threshold of unemployment, has not been as effective as hoped.

"Changes to the targets, or to how they are interpreted, can add to the uncertainty," said Kenningham.

At last week's meeting, the Fed downgraded its gross domestic product growth projection for this year to 2.0-2.3 percent, from 2.3-2.6 percent, and cut its 2014 growth forecast to 2.9-3.1 percent from 3.0-3.5 percent.

"The reason there was such a large market reaction to the Fed's announcement on September 18 was not simply that the decision itself was unexpected, but that the Fed gave the impression that it was moving the goalposts for monetary policy," he added.

(Read more: Fed party not over for banks: Pro)

"We are skeptical that the introduction of "forward guidance" has done much apart from sow confusion...These developments have highlighted some of the problems inherent in this approach... the proliferation of numerical targets and thresholds can simply add to confusion," he said.

By contrast, the Bank of Japan seems to have had much less trouble communicating with markets, said Kenningham.

"Compared to the Fed, the Bank of Japan's communications have been brief but admirably clear," he said, referring to the central bank's unveiling of $1.4 trillion worth of stimulus in April in a bid to achieve a 2 percent inflation target.

"The markets have been happy to take it for granted that the Japanese official interest rates will remain at zero for the foreseeable future and that the Bank of Japan will step up its purchase of JGBs if necessary, without the rigmarole of additional targets, knockouts and thresholds," he said.

(Read more: 'No taper' shouldn't have surprised: NY Fed boss)

Meanwhile, other analysts told CNBC this week that the Fed's recent decision not to taper has created a "whole new level of uncertainty."

"For a while bad news was good news: [on] bad reports you could [invest], because the Fed had said they would continue to ease. But once the market got comfortable with them reducing the pace of purchases, they said they are not going to do it," said Scott Redler, chief strategic officer at T3live.com.

— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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