WASHINGTON The Federal Reserve confused financial markets earlier this year by issuing a series of "cloudy and conflicting" remarks on monetary policy, according to an internal panel of advisers, who urged that it do a better job of communicating in the future.
Minutes of the September meeting of the U.S. central bank's Federal Advisory Council, released on Friday, described in unusually critical terms a period of intense market volatility, beginning in May, that pushed borrowing costs sharply higher.
"Effective communication around forward policy actions is particularly important in the current environment because of the continued fragility of the economic recovery (and) the expected upcoming transition to a new Federal Reserve Chair," it said.
The council is comprised of 12 representatives of the banking industry, nominated from each of the Fed's 12 regional branches. It meets quarterly in Washington.
President Barack Obama is expected to nominate his choice to succeed Fed Chairman Ben Bernanke, whose term ends in January, in the coming weeks.
U.S. bond yields began rising after Bernanke declared in May that the Fed might begin scaling back bond buying in the next few meetings, from its $85 billion monthly pace.
The upward trend in bond yields accelerated sharply after Bernanke in late June said that the Fed expected to taper bond purchases later this year, and end the program by mid-2014.
But the market charged the other way when the Fed opted to hold steady on its pace of purchases at its September meeting.
"Confusion and volatility has been exacerbated by the somewhat cloudy and conflicting statements made by FOMC members," the council said, referring to the policy-setting Federal Open Market Committee.
Some economists feel Bernanke's looming departure has created damaging uncertainty about who really speaks for the Fed. His term ends on January 31.
Fed Vice Chair Janet Yellen is the leading contender to replace him, but she has made no policy comments in recent months - a silence that is widely viewed as a calculated decision to not hurt her chances of getting the job.
But other members of the Fed's 19-seat committee have vigorously argued their personal policy positions.
The Advisory Council recommended that the Fed do a better job of communicating.
"Greater consistency, simplicity and clarity concerning the FOMC's forward guidance would both improve the effectiveness of the guidance in achieving its objectives and reduce the potential for unintended consequences," it said.
It also recommended taking "pro-active steps" to anchor expectations for the future path of interest rates.
The Fed is already debating enhancements to its forward guidance on when it will begin to raise rates, which currently commits to keeping rates near zero until unemployment falls to 6.5 percent, provided the inflation outlook stays under 2.5 percent.
(Reporting by Alister Bull; Editing by Leslie Adler)