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Why the Fed Surprised Us

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois, U.S.
Daniel Acker | Bloomberg | Getty Images
Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois, U.S.

The Federal Reserve’s decision to announce it does not anticipate raising rate targets until at least the middle of 2013 caught a lot of people by surprise.

And, of course, that’s exactly what it is intended to do.

You see, Fed Chair Ben Bernanke believes that surprise is necessary for monetary policy announcements like this to stimulate the economy.

He explained it all in a paper written back in 2004:

Although communication is always important, its importance may be elevated when the policy rate is constrained by the [zero lower bound]. In particular, even with the overnight rate at zero, the central bank may be able to impart additional stimulus to the economy by persuading the public that the policy rate will remain low for a longer period than was previously expected. One means of doing so would be to shade interest-rate expectations downward is by making a commitment to the public to follow a policy of extended monetary ease. This commitment, if credible and not previously expected, should lower longer-term rates, support other asset prices, and boost aggregate demand.

Got that? The Fed chairman believes that it is important that announcements like this are “not previously expected.”

Surprising markets is part of the policy.

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