The Power of the Fed

The other day in class I was talking about the power of the Fed. Even small word changes can make or break folks on Wall Street. From Brad Delong:

Yes, Virginia, Cheap Talk Can Move Markets
From the Whiskey Bar:

Billmon: You Can't Please Everyone: The Federal Reserve's Federal Open Market Committee changed exactly nine little words... and managed to wipe out about $120 billion in stock market capitalization in the process. Not too bad for government work. The nine words are the bolded ones in the following sentence, which was included in every previous statement issued by the FOMC for the past five months: "With inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period."

But in yesterday's statement that same sentence was changed to read: "With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation."

That's it -- that was the only change. The Fed didn't raise rates. It didn't even hint that it would raise rates. But it became infinitesimally less willing to guarantee that rates will stay low for the indefinite future. And Wall Street didn't like that one little bit.

Actually, only four words were changed: "policy accommodation," "can," "maintained," and "be" remain the same. The words "for a considerable period" are replaced by "it," "patient," and "in removing its."

Keywords: ECO301, ECO120, Fed