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A friend sent me this article. The upshot is that it is becoming increasingly difficult to understand the statements issued by the Federal Reserve.

Complexity of Federal Reserve statements

Thara – It is understandable. We are living in a deflationary period. This is when conventional tools normally used by the central bank, like adjusting interest rates, are generally ineffective. Generally, you cannot really lower the borrowing interest rate any lower than zero percent. Now, this may not be a problem if the Government increases spending to compensate for the lack of economic activity. But the data has shown that the Obama administration has been cutting government spending over his two terms. In effect, the Federal Reserve has no choice but to stimulate the US economy by satisfying the demand for risk-free assets through its QE programs.

As a single large provider of risk-free assets, its announcements become increasingly important for the market in general. That is, the market becomes more dependent of what the Fed is saying. Therefore, it is understandable that the Fed chose to be more cautious in the way they expressed their intention, hence, an increasingly complex language.

As a consequence, as the US economy returns to normalcy, we would expect that the complexity of the Fed statements to reduce too.

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