When the Fed began its talk of “tapering” asset purchases, I warned that it might turn out to be a “historic mistake”. I guess the historic bit is still up in the air; but the mistake aspect is now glaringly obvious. Bond prices have plunged, and the Fed’s attempts to inform markets that they’ve got it all wrong have only modestly mitigated the impact.

What went wrong? The Fed grossly misunderstood the nature of the relationship between its statements and market expectations. It believed that the market was listening closely to the details of what it said. In fact, the market doesn’t — and probably shouldn’t. Instead, it listens to the tone of Fed statements, and also Fed actions; it’s more a matter of character judgment than mathematics. And what the Fed conveyed with the tapering talk was a sense that its heart really isn’t in this stimulus thing.

OK, a bit more detail. Right now, the Fed is doing two things in an attempt to boost the economy: it’s promising to keep short-term rates, which it controls, low; and it’s trying to reduce long-term rates directly, through bond purchases. What the Fed said was that it was thinking of slowing down those bond purchases — but not to worry, it still plans to keep short-term rates low.

But as Gavyn Davies shows, the market responded by sharply marking up its expectations for future short-term rates. In April, the market thought there was almost no chance the Fed would raise rates next year; now such a rise is considered more likely than not.

Fed officials are frustrated. Weren’t investors listening? But the Fed was foolish here — and the investors aren’t.

The key point you always have to remember (but which the Fed somehow forgot) is that there is no way to lock in future monetary policy. Whatever the Federal Open Market Committee may say now about its plans for 2014 or 2015, it can always do something different when the future turns into the present.

So what’s the point of Fed communication? Mainly it’s not about the specific numbers; it’s about conveying what kind of central bankers we’re dealing with, and hence what they’re likely to do in the future. Talk of extended easy money can help the economy now precisely because it makes the Fed sound like it’s not a conventionally-minded central bank, eager to snatch away the punch bowl; even asset purchases work mainly because they reinforce that impression of unconventionality.

But when the Fed starts talking about tapering at a time when unemployment is still very high and inflation below target, it undoes all of that good work; suddenly the FOMC starts sounding once again like a group whose fingers are already twitching as they fight the urge to grab that punch bowl.

Undoing this damage is going to be very hard. One thing that will matter a lot, however, is the choice of Bernanke’s successor. If she’s a well-known dove, that could help a lot. If he’s, say, someone known for saying things like “stimulus is sugar“, look out below.