The last two months have been a nightmare for the Federal Reserve, which has been doing everything in its power to depress long-term interest rates. The yield on the 10-year Treasury note rose more than a full percentage point from early May to early July amid talk of the Fed first cutting its asset purchases, and then ending them by mid-2014, assuming the economy lives up to its relatively upbeat forecast.
The diagnosis for the rise in rates was "poor communication," which Fed Chairman Ben Bernanke seems to be trying to correct. He used the Q&A session after a speech recently to attempt to coax yields down, with only a modicum of success.
The problem isn't communication. Bernanke said the same thing at his June 19 news conference, triggering a bond market plunge, as he did last week, when he sparked a rally. If it sounded different, it was in the ear of the listener.
Rather, the problem is the underlying message. The U.S. economy is gradually improving. Just as the emergency lending facilities created at the peak of the financial crisis became superfluous, so, too, will large-scale asset purchases and an exceptionally low federal funds rate.
No amount of hand-holding by Bernanke can change that reality - or the prospect of higher rates.
Bernanke gave it another shot last week at his semi-annual monetary policy testimony to the House Financial Services Committee. He reiterated the key points in language a kindergartner could understand:
The Fed's pace of asset purchases isn't fixed. (Did anyone think it was?)
The benchmark overnight rate will stay close to zero for "the foreseeable future."
Thresholds aren't targets.
That's about as clear as it gets in a world where the future is unclear.
Yet short-term interest rates are holding on to some residual expectations of rate increases next year even though the majority of policymakers anticipate no change until 2015.
Long-term interest rates, the focus of the Fed's quantitative easing, have retraced only about a quarter of their losses since May. "Markets are beginning to understand our message," Bernanke said, somewhat hopefully.
They are. They just disagree with the appropriate level of interest rates.
What's more, the "they" - the buy-and-hold investors who were content to hide in Treasury securities earlier this year to avoid risk - has changed.
With the stock market flirting with new highs and housing percolating, investors have been selling Treasuries to bond dealers, who have a somewhat different focus. Rather than a haven, a five-year Treasury yielding 0.64 percent (May's low yield) represents a big loss if you expect the funds rate to normalize before the note matures.
Andy Barr, a Republican from Kentucky, asked Bernanke about the Fed's exit strategy. Given the adverse credit-market reaction to the possibility of tapering, how, did the Fed plan to prevent a "catastrophic spike in interest rates" when the time comes to end QE?
"By communicating, by not surprising people," Bernanke said.
I can't tell if the Fed chairman believes this. Under Bernanke, Fed communication has taken on a life of its own. Policymakers seem to talk as if they can send rates tumbling again. They can't.
The Fed has come a long way from the pre-1994 era, when rate decisions were shrouded in mystery. It now communicates its objectives and what it intends to do to achieve them.
Communication has its limits, however. It can't forestall a cyclical rise in interest rates or even guarantee that the increase is orderly.
Bernanke's response to Barr's question suggests he believes the Fed can control outcomes, and interest rates, through communication. Somehow I doubt it. I view the market's response to talk of tapering as a taste of things to come.
The Fed will be relieved when the economy can shed its training wheels and ride on its own. Higher interest rates should be viewed as a badge of success. In fact, something would be amiss if a stronger economy didn't usher in higher rates. Have I made myself clear?
Caroline Baum, author of "Just What I Said," is a Bloomberg View columnist.