Despite the Fed’s strongest efforts at improving its ‘communication’, the average American is relatvely unaware of just what it is that QE does (and is). Reuters reports that a sad 73% of respondents could not define what the crucial-to-the-market’s-survival program is with 12% of respondents believing QE was a computer-assisted program that the Fed uses to manipulate the dollar; and another 11% thought it was part of the Dodd-Frank Wall Street reform legislation enacted following the crisis.
With the ‘taper’ due to be announced today and the ‘tapering is not tightening’ message being trumpeted loud and clear, we suspect that will not get through to the public either; but as the infamous Michael Woodford noted, it doesn’t matter, “the beliefs of the general public… [aren’t] the primary channel that the Fed has been relying upon.” More relevant, he said, is whether bond traders understand the Fed’s intent.
The Fed’s $2.8 trillion “quantitative easing” program has, among other things, lifted stock prices to record highs, driven interest rates to record lows and put a floor under what had been a reeling housing market.
Yet barely a quarter of Americans even know what it is.
A poll leading up to the Fed’s pivotal decision … found just 27 percent of U.S. adults could pick the correct definition of quantitative easing from among five possible answers.
Twelve percent of respondents thought QE was a computer-assisted program that the Fed uses to manipulate the dollar. Another 11 percent thought it was part of the Dodd-Frank Wall Street reform legislation enacted following the crisis.
To be sure, two of the more popular incorrect answers – “a way the Fed makes it easier for commercial banks to borrow money from Fed and relend it to consumers,” and “when the Fed repeatedly lowers its official interest rate” – were in the right ballpark, if not completely on target.
After all, quantitative easing is geared to reducing borrowing costs.
But for a Fed that has emphasized how important communications are – and how much the effectiveness of its policies depends on the public’s understanding of their impact on inflation and employment – the fact that 73 percent of respondents cannot define the critical program suggests the Fed has a serious communications challenge.
In particular, Fed officials have stressed how important it is that the public does not equate a reduction in quantitative easing with a rise in interest rates.
“I think they understand the Fed is trying to stimulate the economy, but I don’t think they understand the mechanics of how it works,” Anderson said. That means, he said, “People get the message that interest rates are going up.”
“The beliefs of the general public… isn’t the primary channel that the Fed has been relying upon,” Woodford said.
More relevant, he said, is whether bond traders understand the Fed’s intent. If they drive interest rates down in response to QE, the program can be effective if those low rates then drive spending.
Seems like, once again, the Fed will fall short on its communication and relying on bond traders to get this right (or equity traders) seems more than hopeful given the volatility in recent months.
Perhaps the QE program was summed up best by 49 year old Lynda LaMonte who works part-time, didn’t get the definition correct but understands that :
“It’s almost like we’ve got Wall street dependent on that money.”
Indeed… that communication seems clear…