Fed lost in semantic policy fog

The campaign for plain English can take serious issue with Federal Reserve chairman Janet Yellen's recent attempts to explain the outlook for rate policy in the United States. The markets are waiting with baited breath for clearer clues, but the latest Fed offerings have been lost in translation. Its policy is about as clear as mud right now.

Former Fed chairmen Paul Volcker and Alan Greenspan earned notoriety in the past for tying the markets in semantic knots, but their terms could almost be seen as a golden age for frankness, considering the blurred lines the markets are getting from Yellen on rates. Right now, the Fed's much-touted "forward guidance" could be considered more akin to "forward hindrance".

Even Yellen has recently had to resort to giving "guidance" on the Fed's forward guidance to boost its flexibility and mute any potential market reaction as the central bank approaches its "lift-off" date.

Forward guidance was supposed to be the Fed's answer to keep policy transparent and provide an indication about the future stance of monetary policy. It has been a vital tool for keeping cool heads throughout the post-2008 financial crisis and to help deal with the cultural shock of quantitative easing and zero interest rates in the US.

Now it is even more vital that the Fed communicates clearly what its intentions are on the "Great Unwind" - the journey back to monetary policy "normalisation". Consumers, companies and the markets have a right to know what it means in terms of implied borrowing costs of and the implications for future investment decisions. Great uncertainty lies ahead for all.

At some stage, the Fed needs to divest itself from its US$4.5 trillion mountain of asset purchases built up over the past six years. There is no urgency to start this just yet, but raising US interest rates from zero to a more "neutral" level remains a high priority, especially with rates expected to head back to around the 3 to 4 per cent mark in the next few years.