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Fed's communication branded 'unclear' by economists

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst
An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst

By Andy Bruce

LONDON (Reuters) - The U.S. Federal Reserve failed to communicate policy clearly in the months leading to Wednesday's surprise decision not to reduce its $85 billion monthly bond-buying policy, according to a firm majority of economists polled by Reuters.

Investors and analysts -- in nearly a dozen consecutive Reuters polls -- had bet that would happen this week, ever since Fed Chairman Ben Bernanke hinted in May that the U.S. central bank would reel in the pace of its stimulus later in the year.

The latest survey, conducted since Thursday, shows the Fed will start tapering its bond purchases in December.

The scale of forecasters' misjudgment produced a clear verdict that the Fed's communication had been "unclear" over the last few months, according to 33 of 48 economists at major international banks, research institutions and trade groups.

The remaining 15 said the Fed had been clear, five of whom forecast correctly that the Fed would maintain its bond purchases this month.

It is rare for a consensus of economists to criticize a major central bank. Reuters polls have shown consistent high marks for the way central banks have handled policy since the global financial crisis erupted in 2008.

Although there is now a clear consensus the Fed will taper in December, confusion about its recent communication means December is not necessarily a done deal.

"In December -- who knows? I think they have lost market trust, and even when they communicate the market will surely question," said Sam Bullard, senior economist at Wells Fargo.

"There is also a risk that we might go into next year (for tapering) given the (economic) performance that we are likely to see in the next three months," Bullard added.

Some respondents were more strident in their criticism. One described the Fed's recent communication of policy as "buried under a pile of horse dung".

The Fed's website says clear communication is "always important in central banking, and is especially important in the present circumstances when the economy requires further policy stimulus".

On Wednesday, the Fed cited strains in the economy from tight fiscal policy and higher mortgage rates in explaining why it decided not to cut back on its asset purchases.

WHO'S THE BOSS?

Ben Bernanke's imminent departure as Fed chairman was cited as one reason for the miscommunication.

"This was an awkward period for the leadership of the Fed to make a forceful statement. Chairman Bernanke is a lame duck and seems to be taking a lower profile," Ethan Harris, global economist at BofA Merrill Lynch Global Research, said in a note.

On Wednesday, Bernanke refused to commit to reducing the bond purchases this year, and instead went out of his way to stress the program was "not on a preset course". In June he had said the Fed expected to cut back before year-end.

Janet Yellen, the Fed's current vice chairman, is the firm favorite to succeed him.

Forty-two economists said the Fed would now taper in December, the last chance for policymakers to follow through on Bernanke's earlier guidance, while 11 thought it would happen early next year.

"The two remaining meetings this year are on October 29-30 and December 17-18. The second has a press conference, which would make it more suitable for the first taper," said Philip Marey, senior U.S. strategist at Rabobank, in a note.

Although Fed officials have indicated October should not be ruled out, Marey said they would probably wait until December, after the outcome of another round of political battles on Capitol Hill over the debt ceiling.

Only six economists thought it would come next month, while one forecast November and one saw the second quarter of 2014.

The poll suggested the Fed would trim its bond buying by $15 billion, comprising a $10 billion cut in Treasury note purchases, and $5 billion in mortgage-backed securities.

Analysts bumped up their estimate for the total size of the Fed's third round of quantitative easing to more than $1.4 trillion, compared with $1.3 trillion before Wednesday's meeting.

(Additional reporting by Ashrith Rao Doddi and Yati Himatsingka in Bangalore; Polling by Sarbani Haldar and Ashrith Rao Doddi; Editing by Leslie Adler)

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