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Analysts say Fed may have lost credibility this week

Sept. 20, 2013 at 9:41 AM   |   Comments

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NEW YORK, Sept. 20 (UPI) -- The U.S. Federal Reserve's most recent policy decision may have cost the central bank some of its credibility, analysts on Wall Street said.

"The whole key to forward guidance is you have to have the market rely upon what you're telling them," Scott Minerd, chief investment officer at Guggenheim Partners, told The Wall Street Journal.

"What the Fed did ... decreased their credibility in terms of being able to use forward guidance," Minerd said.

The Fed caught many by surprise Wednesday by announcing it would keep its monetary policies intact, after which Chairman Ben Bernanke explained that the labor market could benefit from continuing with highly accommodating policies.

After the announcement, stocks soared, but partly because equity markets have been depressed for weeks with investors concerned that the Fed would pull back on its quantitative easing.

Long-term interest rates have risen since June on speculation that the Fed would slow down its $85 billion per month asset purchasing program. The higher rates, in turn, slowed the recovery in the interest rate sensitive housing market.

But Wednesday's announcement prompted many to go back through their notes to see why they had guessed wrong.

Some concluded they had been mislead by statements made by Fed officials.

In June, Bernanke discussed winding down the Fed's purchases starting sometime this year and ending the program completely by mid-2014, the Journal reported Friday.

He also said the Fed expected the unemployment rate to be around 7 percent by the time the program ends.

On Wednesday, he took time to explain that the labor market was more complicated than simply looking at one number. The unemployment rate, now at 7.3 percent, had dropped, he conceded, in part because many people had quit looking for work due to the lack of jobs.

The suggestion was that the unemployment rate could drop to 7 percent, but that number might not reflect a strong recovery.

Bernanke said, "there is not any magic number," that would dictate a policy shift. He also said, "If the data confirm our basic outlook ... then we could move later this year."

Having come up short of expectations, "we are worried that when the time comes to taper, and someday tighten, the Fed will not have the courage to follow-through," said Joseph LaVorgna, a Deutsche Bank economist, in a note to his clients.

"In turn, policy makers will shy away from taking sufficiently aggressive action," he wrote.

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