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US Federal Reserve officials must carefully watch every word they say


There was a time not so long ago when the US Federal Reserve said very little about its policies; its leaders did their utmost to obfuscate rather than clarify. Those days are long gone. Today, we are flooded with ‘Fedspeak.’ Last week, 11 top Fed officials made 20 speeches. No wonder concerns are rising about the risk posed by over-communication to the well-functioning of financial markets, efficiency of the economy’s resource allocation and overall stability of the global system.

Appearing before a Congressional committee in 1987, then-Chair Alan Greenspan famously said, “If I seem unduly clear to you, you must have misunderstood what I said.” I detailed in my 2016 book on central banks, The Only Game in Town, that this was part of what Greenspan called a “language of purposeful obfuscation.” It was regarded, to cite Alan Blinder, as a “turgid dialect of English” that used “numerous and complicated words to convey little if any meaning.”

The Greenspan era is well behind us. In 2011, then-Chair Ben Bernanke initiated press conferences after statements issued at the end of Federal Open Market Committee meetings. Later, these became the norm for every policy meeting, supplemented by quarterly publication of FOMC members’ individual forecasts, the release of minutes, a marked step-up in other communication, and an enlargement of the target audience. Fed chairs have appeared on TV and been interviewed for personal profiles in wide-circulation periodicals.

All this is underpinned by the view that transparency is essential for effective forward guidance, which helps the economy and markets transition more smoothly as policy shifts. It is also viewed as central to influencing a broader set of behaviours. Indeed, as The Financial Times remarked in a 2014 editorial, “monetary policy steers the economy through its effect on sentiment as much as any financial channel such as interest rates.”

Yet, rather than facilitate orderly economic and financial transitions as they did earlier, the now-excessive communication has been contributing to undue market volatility. There are calls for restraint from those worried that too much of it aggravates the risk of market and economic accidents. Some see merit in doing away altogether with ‘blue dots.’ Others would like fewer press conferences and speeches.

The issue goes beyond the volume of Fed talk. It is also its nature. Lacking a strategic anchor and an operational monetary policy framework, the Fed has become excessively data dependent, with officials often pushed to comment right away on inherently volatile data releases in a manner that over-extrapolates their content.

There is also a problem of U-turns. Earlier this month, Chair Jerome Powell gave markets a shock by suddenly distancing himself from the optimism he’d only just expressed over favourable US supply-side developments that enhance potential output and counter inflation. The effect may have run its course, he suggested on 9 November, adding that strong economic growth may warrant further tightening.

It’s no surprise that research published by the Center for Economic Policy Research on ‘The market impact of the Fed press conference’ came to two big conclusions. First, that “market volatility is higher during FOMC conferences… especially the case for press conferences (PCs) given by current Fed Chair Powell.” Second, that since the start of the pandemic “stock and bond markets have tended to move in the opposite direction during PCs compared to their initial reaction to the FOMC statement. This reversal in direction is systematically linked to the words used in Chair Powell’s speeches.” These findings have intensified, judging from yield behaviour, hardening a shift from providing signals to amplifying noise. Forecasters and traders show little hesitation in consistently ignoring Fed guidance, including for policy rates fully set by it. They are doing so again now by pricing in notable rate cuts in 2024.

Fed-com needs a review. It is not just about following Aaron Burr’s “talk less, smile more” advice to Alexander Hamilton in Lin-Manuel Miranda’s musical. It is also about being more attuned to the potential market impact of what is said—especially on signals from noisy data releases that can easily be negated by new numbers—so as to strategically anchor Fed views, and being attentive to consistency of messaging.

Finally, America needs to improve the communication set-up that matters most for the accountability of monetary policy— the one involving the semi-annual questioning of the Fed chair by Congressional committees. Without progress on all this, Fed policy will be less impactful, and, in the long run, the central bank will undermine the political autonomy that is so critical to its effectiveness. ©bloomberg

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.