Why Fed tells markets about its intentions

[SINGAPORE] Amid criticism of the communication policies of central banks, a Nobel laureate has conjectured that the powerful US Federal Reserve gives forward guidance about its intentions not so much to help the market, which is already using the same predictive model as the Fed. Rather, Fed management does so to tie the hands of successors to a consistent policy to maintain the institution's reputation.

Thomas Sargent, known for his work on rational expectations, made this speculation at the fourth Sovereign Wealth Fund Conference at the Singapore Management University (SMU) yesterday - calling his thoughts "beer-time conversation" and "common sense" about things he does not fully understand.

"The FOMC (Federal Open Market Committee) has 19 members, 12 who can vote at any one time. Their terms rotate. They're from all walks of life. They change their minds. They have good days and bad days," he said.