Washington, Aug 12: The blame game in the wake of the bloodiest US bond market rout in nearly a decade is in full swing and many of the fingers are pointed at the Federal Reserve. Accusations are flying that the central bank overplayed its concerns on deflation in a manipulative effort to push long-term interest rates lower to goose the economy. Now the Fed has been ‘caught out,’ as Melvyn Krauss of the Hoover Institution put it in an opinion piece in the Wall Street Journal. Some argue its credibility has been damaged.

“The Fed whipped up a positive frenzy about deflation,” said James Grant of Grant’s Interest Rate Observer. “To my mind not the least of the sins of the Fed in this period was its cavalier willingness to suppress, manipulate and distort what had been more-or-less free prices.” But other analysts say misplaced market bets in the rally that preceded the meltdown may have been more the result of an unusually open Fed debate and a complex policy message than an intention to deceive. “The Fed didn’t set out to consciously screw over markets,” said Adam Posen, a former New York Fed researcher now with the Institute for International Economics.
“Because the Fed is moving to a more transparent regime and therefore is communicating when things are uncertain or when things are contingent, they are more open to being accused of being inconsistent,” he said. “People are just not ready to deal with that yet.” The roots of the current schism trace back to November when Fed officials first began to speak of how they could ward off a potentially crippling decline in consumer prices in the event they ran out of room to cut short-term interest rates. Bureau Report