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Salvage sell off bond market Original Source Link: (May no longer be active)
http://www.forbes.com/markets/newswire/2003/08/30/rtr1070055.htmlhttp://www.forbes.com/markets/newswire/2003/08/30/rtr1070055.html
Fed, markets should pay mutual heed-Fed researcher
Reuters, 08.30.03, 5:26 PM ET
By Victoria Thieberger
JACKSON HOLE, Wyo. (Reuters) - Financial markets and the Federal Reserve should listen more closely to each other to help avoid unwelcome surprises, a top lieutenant to Fed Chairman Alan Greenspan said Saturday.
Vincent Reinhart, the head of the Fed's division of monetary affairs, also told a conference of global central bankers that markets should pay less attention to speeches by individual Fed policy-makers, and more to the official testimonies that Greenspan presents to Congress.
This is because most speeches by Fed officials represent individual opinions rather than common Fed thinking, Reinhart argued. Testimony, however, has usually been vetted by the entire board of governors.
"The truth is that monetary policy is made by 19 people whose views on the way the economy works span a wide band in the economic spectrum and, when they speak, they speak for themselves," Reinhart told a panel at the Kansas City Fed's annual conference.
His remarks appeared aimed at smoothing a communication breakdown between the Fed and markets in recent months.
The bond market rallied sharply in May, pushing the 10-year yield down to a low of 3.1 percent in early June. The surge was triggered when Fed officials, in speeches and a statement after their May interest-rate meeting, expressed concern about the very low level of inflation.
"Part of the pronounced response to the announcement following the May meeting this year may have been associated with a realization by market participants of the extent to which the FOMC wanted to avoid certain events," Reinhart said.
SAVAGE SELL-OFF
The market presumed this stated desire to fend off deflation risks meant the Fed was ready to use one of the tools it had listed as an option: buying bonds to boost the economy.
But the June Fed statement and Greenspan's congressional testimony in July poured cold water on that notion, sparking a savage bond sell-off that took the 10-year bond to a yield of 4.6 percent -- more than 1.5 percentage points above its low.
"Despite the efforts on both sides of the public-private divide, surprises sometimes happen," Reinhart noted.
The bond market, also affected by recent signs of economic strength, has settled into a range after the recent turmoil.
Reinhart said over the years, policy-makers have listened more closely to the message from markets, and that studying interest-rate futures has become a "cottage industry" at the Fed. But to set policy by relying exclusively on prevailing market expectations would be like "looking into a mirror."
"Someone ultimately has to be responsible for forming a view on the economy and framing the policy response."
Reinhart tacked on the usual caveat that the views in his speech were his own.
U.S. interest rates are set by the Fed's Federal Open Market Committee, made up of the seven Washington-based governors and 12 regional Fed Bank presidents.
Copyright 2003, Reuters News Service
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