LA CROSSE, Wisc. The Federal Reserve should find more effective ways to communicate with investors, a top Fed official said on Thursday, after markets earlier this year reacted unexpectedly to hints that its massive bond-buying program would eventually end.
Bond yields jumped and stocks swooned after Fed Chairman Ben Bernanke in May suggested 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 bond-buying program would come to an end when the job market showed signs of substantial improvement.
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," Minneapolis Fed President Narayana Kocherlakota said at the University of Wisconsin campus.
A former economics professor, Kocherlakota 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," Kocherlakota said. The Fed should be clearer about the whole path of its bond purchases, he said, "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."
Fed policymakers hold their next meeting on September 17-18, and many economists expect them to announce a reduction in the Fed's pace of bond purchases then. Bernanke in June said the Fed would probably pare the program later this year and end it in mid-2014.
Kocherlakota on Wednesday said the Fed should actually be adding stimulus to the economy, not less. He was not specific about how the Fed should do so.
Kocherlakota had previously advocated publicly that the Fed should vow to keep rates low until unemployment falls to 5.5 percent, not the current threshold of 6.5 percent.
On Thursday, he said he expects unemployment to stay above its normal range of 5.2 percent to 6 percent for a number of years, and that as long as the Fed continues to make progress on bringing the rate down, it will likely keep rates low.
The Fed, he said, should find ways to be clearer about when and how fast it is likely to raise rates after unemployment falls to its current threshold of 6.5 percent.
(Reporting by David Bailey; Writing by Ann Saphir; Editing by James Dalgleish and Chizu Nomiyama)