Communications Channel

As I've been noting lately, press reports that the Fed is plotting a new round of quantitative easing have been boosting markets and reviving hopes for an economic recovery. Then today the Wall Street Journal published a disturbing story about how Ben Bernanke thinks monetary policy is like golf and he doesn't want to hit too hard.

Action, reaction: "Stocks slid Wednesday as concerns grew over whether the Federal Reserve's plans to buy Treasury bonds might be smaller and slower than anticipated."

This is bad. I think policymakers need to start recognizing the power of communications strategies over the economy under these circumstances. One important reason that changes in nominal interest rates traditionally had a lot of sway over the economy is that they spoke in a well-understood language. Rate cut means "Fed is boosting growth" while rate hike means "Fed is fighting inflation." With nominal rates at zero, this traditional language has fallen apart. But communication still works. The Fed should say that it's ready, willing, and able to do what it takes to boost the price level and that its actions—whether gradual or not—should be read in that light.