When the Fed cut rates in September, W it insisted that it would keep its eye on inflation. But markets did not quite believe it: long-term bond yields and the gold price moved up a bit after the rate cut. Given the Fed's record after the financial turbulence of 1998 and 2001, it is easy to see why the Fed wants to reassure the markets about inflation-and why it might not be believed. Not long ago, central banks felt much less obliged to explain themselves. As recently as 1994 the Fed did not even bother to inform the outside world of a change in its target for the fed funds rate. Financial markets had to work it out for themselves. But these days central bankers' words have become almost as important as the interest rates they set, because of their effect on what markets expect rates to be next month or next year. At the ecb, Mr Trichet knows that his every inflection will be examined. The same goes for officials at just about any central bank. The Fed, for instance, does not hold a press conference after its rate-setting meetings, but the statement of a few dozen words setting out its decision and the reasons for it is chewed and digested by an army of Fed-watchers in the financial industry and the media. Speeches, minutes of central-bank meetings (for those banks that publish them) and regular reports on policy are subjected to minute scrutiny.
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