Why The Fed Wants To Talk To You

Sit down. Fed Chairman Ben Bernanke wants to have a heart to heart chat about the future. i i

Sit down. Fed Chairman Ben Bernanke wants to have a heart to heart chat about the future. Mark Wilson/Getty Images hide caption

itoggle caption Mark Wilson/Getty Images
Sit down. Fed Chairman Ben Bernanke wants to have a heart to heart chat about the future.

Sit down. Fed Chairman Ben Bernanke wants to have a heart to heart chat about the future.

Mark Wilson/Getty Images

Every relationship advice book has the same tip: When you feel the love is slipping away, you have to communicate more.

Perhaps that explains why Federal Reserve officials are opening up and trying something new. They now want to share their feelings with the American public.

The Fed revealed this week that it will start to publish its forecasts of where it feels interest rates are heading. This may not seem like an emotional breakthrough. But it is a big deal for them.

The Fed has traditionally been the strong, silent type. Most of its planning for the future is done in secret behind closed doors. That's why the central bank has spawned so many conspiracy theories and so much distrust. But by openly talking about what path they think interest rates might follow, the Fed is pulling back the curtain and pulling off a neat economic trick.

As we talked about on our podcast a few weeks ago, central banks are like superheroes. They have amazing powers like creating money out of thin air and setting interest rates. More money and lower interest rates should, in theory, give the economy a boost. And just like Superman doesn't have to throw a punch to get the bad guys running, the Federal Reserve can have a huge effect on financial markets just by talking. It only has to wink or nod or hint that it might do something, and investors act like it already happened.

Fed chairman Ben Bernanke has made it his mission to use more of this magic communication power. That's why he's declared that interest rates will stay low until at least 2013. And why he's now holding press conferences.

The latest Fed move takes this concept to a new level. When the Fed reveals its predictions about where interest rates might go in the future, the financial markets get a better sense of what the Fed might do and when. People are more likely to invest if the future seems more predictable. Especially if that future includes a lot of cheap loans.

But there's a catch. Rather than hear one voice from behind the curtain, we'll be hearing a dozen people speak. The Fed will publish the forecasts of all of the members of the policy setting committee. And yes, that could mean 12 different views on what lies ahead for the U.S. economy. It won't exactly inspire confidence if it seems like the people running the Fed can't agree on anything.

And remember, these are forecasts, not guarantees. The Fed officials may embarrass themselves by predicting one thing and then doing something else when the economic winds shift. The communication trick doesn't work if people stop believing you.

If everything goes according to plan, though, the new chattiness can solve a major problem. Interest rates are extremely low right now. Money is cheap and (at least for banks) plentiful. But everyone knows that someday this will have to end. Interest rates will go back up, and it will be more expensive to get loans and do business.

The Federal Reserve doesn't want this to happen too fast or surprise anyone. That kind of shock could send the economy back into recession. So by sharing their forecasts, the Fed can reassure everyone that interest rates will remain low for a good long while. It can keep the love alive.

And when the economy is looking stronger and the time is right, the Fed can use its new found communication skills to gently break the news to the markets. Interest rates are heading back up. The easy money is gone. And you're on your own.

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