by Calculated Risk on 3/09/2010 03:28:00 PM

One of the important points NY Fed VP Brian Sack made in his speech yesterday was the need for clear communication:

[T]his tightening cycle, when it arrives, will be more complicated than past cycles, as there will be more decision points facing policymakers. With more decision points come more opportunities for the markets to be confused by our actions. The recent changes to the discount rate and the Treasury's Supplementary Financing Program balances highlight this concern, as the amount of attention that those actions received was outsized relative to their significance for the economy or for the path of short-term interest rates.

The burden is on the Fed to mitigate this risk by communicating clearly about its policy intentions and the purpose of any operational moves it might take. In this regard, the forward-looking policy language that the FOMC is currently using in its statement is important. I would argue that this language contains much more direct and valuable information about the likely path of the short-term interest rate target than does any decision about draining reserves.

Sack singled out two recent releases that he believes were misunderstood.

The first was the change to the Discount Rate on February 18th. I think that release was very clear and it was released after the market closed. The increase in the discount rate had been expected, but the timing was a little surprising since the FOMC has trained participants that inter-meeting announcements are special.

Brian Sack suggests the FOMC should communicate "clearly about its policy intentions and the purpose of any operational moves it might take". Clearly the Fed could have done better, if, as Sack suggests, they had included a few sentences in the FOMC statement released a few weeks earlier and mentioned the possibility of this move.

Still any "outsized" attention was probably from people who didn't read the release (I'm not sure how to fix that problem).

The other announcement that Sack highlighted was from Treasury on the Supplementary Financing Program:

The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program (SFP):

"Treasury anticipates that the balance in the Treasury's Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009.

This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills. Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted."

That was it.

Although I got that one right, is it any wonder that some people were confused by this statement? Why not expand and explain why this action was being taken?

It was a considered a positive step when the Treasury started to unwind the SFP, and here they are expanding it again without explanation.

Brian Sack argued the burden is on the Fed to communicate clearly and explain the reasons behind each action. I agree. And I'd suggest the burden is also on Treasury.