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If They’d Just Shut Up…
Fed officials need to stop talking. Or at least dial it down.
Back in February, while calling for a "Volcker moment," the incomparable Zoltan Pozsar suggested monetary policymakers were doing more harm than good while attempting to lay the groundwork for the first rate hike.
"Maybe FOMC members talk too much. They don’t keep the market guessing," he said. By that he meant current FOMC members. Former officials, by contrast, can talk as much as they want. Or at least that's the impression one
An article in today’s Times business section about the ongoing mess that is the Argentine economy is a timely reminder that embedded double-digit inflation negatively affects a much larger share of a population than does a recession which drives unemployment into the high single digits. Recessions are a price we pay, collectively, to live in a capitalist society.
https://www.nytimes.com/2022/08/06/business/inflation-argentina.html
And then there were the good old days…
https://www.nytimes.com/1969/04/04/archives/federal-reserve-orders-rise-to-6-in-discount-rate-reserves-required.html?unlocked_article_code=AAAAAAAAAAAAAAAACEIPuomT1JKd6J17Vw1cRCfTTMQmqxCdw_PIxftl1yGva3DJDm4eiO0PCIiB5UrWIqRua9Yp1jDeXtJaPaUxSbl11ONSJVcoUQizr96Yn9FbZiQz7I6yRWgxwpTRGKox7TKvdGSiJf1hyab6pR-fLTmqDPHDiDB-eR133vsDGz3KoX8YmeeDGfhoipI4ha1_UoYrQGwCYnWL7e25CEgvJNnVPBzD4gU1CPUKWDnZyoKXvrpRcF1CGBmRGiMElGU64dtcOd4VPb-ubEJzPZqj3shCTzBgP4yrBJYuRonLlrsMsrfFrBeEy8ve1OxhXewP_-uC6jDmQQ5pHLCGP1zxXSgbvCxI_S5cuj2iXcI6iF4jVvhT4GWcFU8SgfdWf-MGHMs&smid=url-share
One other option besides fed dialing down the talk is for us to stop hanging on their every word. Then go out look around and follow the numbers too. Ultimately the Fed will adjust policy to events. Right now, inflation and employment are strong so they will keep hiking short rates. When inflation and employment growth slows they will hike more slowly or stop.
Although shutting up may be preferable, it’s a lot easier to deviate from what one member may have said on CNBC than it is to deviate from official guidance. If one member says something one day and another says something completely different two days later we should have some volatility
My theory is the Fed’s collective loquacity is for political purposes.
Explaining and defending themselves to the American people – oh, who are we kidding, to the American politicians – may seem even more important to an institution that has lost some status in a Washington that chafes at an independent Central Bank across the political spectrum from Trump to Warren, appears to be increasingly comprised of economics-and-market-illiterates, and seems to be measuring Powell’s neck for the Noose of Blame.
Who seriously doubts that a second Trump administration won’t try to turn the Fed into a tame Lion, or that the progressive Democrats wouldn’t like to expand the Fed’s mandate to climate change, diversity, equity, and so on?
As for volatility, I wonder if the market getting no Fed communication, or the market misinterpreting Fed communication, ultimately leads to more volatility. I know the latter is way more irritating to, well, me.
The Fed has their hands full with the current mandate. I can’t see how expanding that will make things better.
I’d much rather the Fed stop talking so much, especially in nook and cranny outlets, and perhaps spend more time sussing out systemic risks or the necessity of double-digit revolving credit margins.
But what I really bemoan is this obsession with the Fed as only a binary force — tightening or easing. There is at least one other state – pausing/holding – whether to give their actions time to show up in the data or to determine whether new data should impact their future actions. It is not only up or only down, nor is a pause inherently dovish or hawkish, regardless of the trend. We have a notion of neutral, then either side of that is easing or tightening. But tightening and easing are relative, whether in rates or the Fed’s balance sheet maneuverings.
It almost seems like the non-science of economics is quickly bleeding into Fed Watching, except wth even less nuance, more phony certainty, and a lot more hyperbole. Which is why I subscribe to this blog. But I don’t see how FedSpeak is intended for anyone other than Wall St and its press, since nearly every lay article I read in say The Washington Post or NYT or even Barrons, cannot seem to talk about interest rates rising, without further clarifying that means bond prices are falling. And don’t get me started on basis points. Is this the public the Fed is seeking to keep apprised?
(OK, just a little on basis points. Can we please all agree that you may NOT use the term basis point if you also explain that it is 1/100th of one percent. For God’s sake, one or the other).