If you took anything away from the past 24 hours in markets, it should probably be that policymakers would do well to either say less or, my preference, say nothing at all.
Last month, in “If They’d Just Shut Up” I not-so-gently suggested that policymakers should… well, just shut up. Because they’re not helping. To the extent everyday people are listening (they aren’t), central banker rhetoric comes across as doublespeak, at best. At worst, it could easily be “mistaken” (note the scare quotes) for haplessness.
In my opinion, the situation is made immeasurably worse by Jerome Powell’s inability to feign conviction. When he took the reins from Janet Yellen, Powell famously promised to shift Fed communications in the direction of “plain English.” I said from the outset that wouldn’t go well, and it hasn’t, but usually for reasons I didn’t expect. I thought Powell would be too assertive or too blunt. I thought he might jeopardize the anesthetizing effect of a PhD droning on for 90 minutes in impenetrable econospeak. That was forward guidance nirvana — like drifting blissfully off to sleep while watching the final round of a golf tournament on a Sunday afternoon. Instead, Powell infallibly comes across as timid and nervous. Like the (Pavlovian) canines they are, market participants pick up on that, and respond accordingly. If you’ve ever had a dog, you know that when you’re nervous, he (or she) is nervous too.
Wednesday’s post-FOMC press conference was no exception to the above characterization of Powell. Although he was careful not to be drawn into any predictions other than those conveyed by the new SEP, he was the opposite of sure-footed. He was single-minded, in that he reiterated the Fed’s one-track focus on inflation, but single-minded is something different than sure-footed. Where he ostensibly wanted to convey unwavering determination, he once again came across as polite and regretful. Wistful zingers like, “It’d be nice if there were a way to just wish [inflation] away,” aren’t the sort of remarks you’d expect to hear from a general. If I’m headed into battle, I don’t want to hear my commanding officer say, “I wish there were a way to just wish this war away.” That’s not the sort of thing that conveys intestinal fortitude or gets the adrenaline going. “Go give ’em hell!” is more apt.
Powell always sounds like he’s apologizing. Only for the wrong thing. In New Zealand, Adrian Orr, on behalf of RBNZ, said he was sorry for the bank’s role in inflation. And RBNZ was at the forefront of the initial DM hiking onslaught. While not perfect, their communication strategy this year (the “path of least regrets” messaging) was at least coherent. Powell, by contrast, seems to be apologizing not for stoking inflation, but for fighting it. And all too often, he isn’t coherent. It’s hard to feel bad for him. After all, it was Powell who insisted on holding press conferences after every meeting. September was an SEP meeting, so there would’ve been a press conference anyway, but then again, just as Powell had the capacity to dictate more press conferences, he could just as easily say no more press conferences.
“Here’s the thing. Due to the critical nature and expectation of Chair Powell needing to maintain ‘tight financial conditions’ during the press conference yesterday — especially after [the July] Q&A faux pas saw him inadvertently ease FCI with ‘two-sided’ commentary — markets were expecting forceful and deliberate language,” Nomura’s Charlie McElligott said Thursday, in a note called “Say Less.” “The qualifying / minimizing language, specifically around the critical concept of running a restrictive policy, caught markets offside.”
The price action during the press conference was (obviously) a total mess. The confusion is documented for posterity in the string of real-time posts penned by Bloomberg’s terminal bloggers during Powell’s remarks. Their frantic efforts to explain the market’s “zoomies” by way of soundbites from Powell were a testament to how counterproductive Fed speak has become.
On August 7, less than two weeks after Powell accidentally turbocharged the summer equity rally by stumbling into a dovish spin on a 75bps rate hike (a feat so unlikely that it could only be accomplished by accident), I wrote that,
Policymakers shouldn’t just stop listening to the market, but rather cut the market out altogether by, perhaps, doing away with press conferences, suspending the SEP and going into a self-imposed media blackout indefinitely. In such a scenario, policy decisions would be released on scheduled days, but they could come at any other time too, and Powell wouldn’t be “pleased to take your questions” following those decisions, because unless you intended to convey something about your own expectations for inflation and those of other people, nothing you might be wondering would be relevant to setting policy.
Importantly, I emphasized, that wouldn’t constitute a black box. Everyone would know what the inputs are: Inflation expectations and realized inflation. When the former are anchored and the latter near target, then, perhaps, policymakers might take a few questions here and there.
It’s also worth noting that the Fed’s pretensions to doing away with forward guidance are now laughable. The new dots committed the Fed to a specific amount of tightening over the next two meetings. Thanks to the updated 2022 median, anything other than 125bps in November and December (combined) will have to be explained away by the December dots, which would just amount to updated forward guidance.
Finally, let me remind readers what true independence means. I wrote about this on September 9. A truly independent Fed sets policy as it sees fit and isn’t compelled to explain itself to anyone, ever. That’s independence. If the executive or Congress isn’t enamored with the way things are working out, they can always remove (or replace) Fed officials or change the Fed’s mandate. And if the public is displeased, voters can elect new presidents and politicians. (Or at least in theory.)
When considered in that light, it’s not obvious why every, single weekday has to feature a Fed official explaining something to, or debating something with, someone who isn’t also a Fed official. There’s a (very strong) argument to be made that the more entangled the Fed is in public discourse, the worse off policymakers are when it comes to operational latitude in pursuit of their mandate.
Commenting on Wednesday’s press conference, Larry Summers said that although Powell was “very thoughtful,” the Fed’s credibility might be better served without “frequent hour-long dialogues on hypotheticals and the unforecastable, with the backdrop of gyrating markets.”
“Between press conferences and dot plots and minutes, the Fed should consider the idea of TMI,” Summers mused.