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A necessary element of surprise

The Federal Reserve caught the markets off their guard when it slashed the Federal Funds rate by half a percentage point on April 18.

It was the fourth reduction this year and the second time since January 3 that the US central bank has cut the key overnight rate between meetings of its Federal Open Market Committee. "The April move clearly was a shocker," says David Greenlaw, an economist at Morgan Stanley. "Still, it was less surprising than the cut on January 3 - a move that signalled something had changed, from the standpoint of Fed timing." The Fed had rarely taken such important steps between FOMC meetings, except in times of crisis. So what's going on?

The US has been a leader in the trend away from secrecy in central banking. The Fed changed its procedures as recently as January of last year to be more open about its goals and short-term tactics and gave new priority to making them easier to understand. Surprise, one might expect, would be extremely rare under such a regime.

The Federal Reserve now issues a public statement immediately after every FOMC meeting, disclosing the policy stance adopted by the committee as well as the FOMC's views on the economic outlook.

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