Fed official: Yup, we're confusing sometimes

Narayana Kocherlakota
Craig Lassig | Bloomberg | Getty Images
Narayana Kocherlakota

The Federal Reserve needs to find more effective ways to communicate with investors, one of its top officials said Thursday.

The reference was to events earlier this year, when bond yields jumped and stocks swooned after Fed Chairman Ben Bernanke suggested in May that the Fed could start to trim its $85 billion-a-month bond-buying program later this year.

The market reaction took some Fed policymakers by surprise because they believed that they had already made clear that the program would end when the job market showed signs of substantial improvement.

(Read more: To taper or not taper: Traders watch all things jobs for next Fed move)

The jobless rate registered 7.4 percent in July, down from 8.2 percent when the Fed started the bond purchases.

"I wouldn't say 'overreacted'; I would say we have to do a better job at communicating," said Minneapolis Fed President Narayana Kocherlakota, speaking at the University of Wisconsin.

Kocherlakota, a former economics professor, said it was like delivering a series of lectures and then giving a test, only to find the students all do terribly on it.

"The markets reacted in a way that I didn't expect," he said. The Fed should be clearer about the bond purchases "and try to be more compelling, that maybe this reduction doesn't mean as much as people think it means for the whole market going forward," he added.

Fed policymakers hold their next meeting on Sept. 17 and 18, and many economists expect them to announce a reduction in the purchases. In June, Bernanke said the Fed would probably pare the program later this year and end it in mid-2014.

(Read more: What everyone gets wrong about monetary policy)

Kocherlakota said the Fed should be stimulating the economy more, not less, though he didn't specify how. He had previously advocated publicly that the Fed should keep rates low until unemployment falls to 5.5 percent rather than the current threshold of 6.5 percent.

—By Reuters