It could not have been clearer.
Fed Chairman Ben Bernanke just told us that economists have it wrong. The consensus view is that the Fed will start to raise rates in 2011. Bernanke says that’s not right.
Here’s the key paragraph (read the whole speech here). We broke it in half for easier reading.
Central bank communication provides additional means of increasing the degree of policy accommodation when short-term nominal interest rates are near zero. For example, FOMC postmeeting statements have included forward policy guidance since December 2008, and the most recent statements have reflected the FOMC's anticipation that exceptionally low levels of the federal funds rate are likely to be warranted "for an extended period," contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language of the statement in some way that indicates that the Committee expects to keep the target for the federal funds rate low for longer than markets expect.
Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations. A potential drawback of using the FOMC's statement in this way is that, at least without a more comprehensive framework in place, it may be difficult to convey the Committee's policy intentions with sufficient precision and conditionality. The Committee will continue to actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies.
Got that? The FOMC needs to figure out how to tell the market that it is going to keep interest rates lower for “longer than markets expect.”
Message received, Ben.
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