FORTUNE — The Federal Reserve’s exit from its bond-buying experiment in monetary policy was never going to be pretty. It just got a lot messier.
If you were watching the market on Wednesday afternoon, you might have gotten the impression that the Fed made another great move. The Dow (INDU) shot up over 150 points on news that the Fed was not in fact going to pull back on its bond purchases. But if you were watching Ben Bernanke’s press conference, you would have seen something very different: a train wreck.
The Fed chairman struggled to explain why he had spent the summer, starting in late May, signaling pretty clearly that the Fed planned to pull back on its bond buying stimulus program in September only now to say never mind. In fact, Bernanke now says that it might not even happen this year. And remember when he pledged the Fed would end its bond purchases when the unemployment rate hit 7%? Yeah, he didn’t really mean that either.
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Instead, Bernanke said what he was really looking for was substantial improvement in the job market. Unfortunately, what he sees is only improvement. So no taper. Clear?
From the beginning, communication has been a key part of Bernanke’s monetary policy. It has been the signature of Bernanke’s Fed. Along with setting interest rates, and buying bonds, what Bernanke said was nearly as important to how he worked his magic. Bernanke’s communication seemed to solve two of the Fed’s perennial interest rate problems.
First of all, it allowed Bernanke to get past the zero bound problem. By promising to keep rates low for longer and longer, he was able to push down long-term interest rates by just talking. Second, it solved one of the key problems the Fed always has with interest rates. Investors start to interpret good news as a sign that the Fed will raise rates, causing the market to fall. And those market dips hurt confidence, which can in turn hurt the economy. Low interest rates become a no-way-out affair.
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Bernanke’s solution, it seems, was to tell us what he was going to do and when. And it worked, for a while.
But lately it has been getting harder to believe Bernanke. He was continuing to say that the Fed won’t raise interest rates until mid-2015, yet by the Fed’s estimates and others, the unemployment rate by that point would be getting close to 6%, past where most people expect the Fed to raise interest rates. Wednesday’s taper two-step will diminish Bernanke and the Fed’s credibility further. The market went up today because it caught Bernanke in a lie. That will make it harder for Bernanke, and the Fed, to claim it really means it next time. So much for the power of communication.