Don’t Read His Lips - The Atlantic

Don’t Read His Lips – The Atlantic

When Jerome Powell, the chairman of the Federal Reserve, talked last week after the monthly Fed meeting, he was trying to convey the message that the fight against inflation was not yet won and that the Fed planned to continue raising interest rates over the next few months. “We’re talking about a few more rate hikes,” he said, adding that the Fed needed “a lot more evidence” to be confident that inflation was down.

All in all, it seemed like a straightforward presentation of the Fed’s outlook. But investors ignored it, because of something else Powell saidnamely that “the disinflationary process has begun”. Once investors heard the magic word disinflationarythey jumped to the conclusion that the Fed was no longer as hawkish as it had been and sent stocks soaring.

So when Powell spoken yesterday at the Economic Club in Washington, DC, he wanted to make sure no one missed the point. Although he again used the word disinflation, he said the process of reducing inflation would be “bumpy” and likely to take “a little time”, and added that “further rate hikes” were expected. Investors are betting the Fed’s tough talk is just a bluff and will actually end Cut rate before the end of the year. Yesterday, Powell seemed to say, Don’t test us.

This kind of public exhortation — or gentle nudges, depending on your perspective — to manage investor expectations has become so familiar from Fed chairs that it’s easy to forget how this is a new practice. For most of the Fed’s history, its members almost never commented on monetary policy decisions as they occurred, and rarely said anything about what they anticipated on the future path. interest rates. (William Greider’s 1987 book on the Fed was aptly titled Secrets of the Temple.) Until 1994, the Fed didn’t even announce at its monthly meeting whether it had raised or lowered interest rates: people figured that out after the fact by looking at what was happening to interest rates .

Since then, however, the Fed has gradually moved towards more transparency and more public communication of its thinking. Chairman Alan Greenspan may have been proud of his mastery of Fed obfuscative language – he once said, “If I sound unduly clear to you, you must have misunderstood what I said” – but in 2003, During Greenspan’s tenure, the Fed for the first time made a statement about its expectations for future policy action.

The Big Change in Fed Communications came with Greenspan’s successor, Ben Bernanke. Bernanke firmly believed that transparency and open discourse were virtues in themselves, but he also – rightly – believed that if the Fed were clearer about what it was trying to accomplish with its policy, markets would be more likely to respond to new financial data in a way that reinforced what the Fed wanted them to do.

In 2011, Bernanke organized the very first press conference scheduled by a Fed chairman; the following year, it established for the first time an explicit benchmark policy of non-inflation, saying the Fed would keep interest rates close to zero as long as unemployment was above 6.5%. Bernanke’s successors, Janet Yellen and Powell, have been equally forthcoming. And other Fed governors regularly speak publicly about the state of the economy and monetary policy.

What’s interesting about this change is that it changed the job of central bankers: Fed chairs don’t just have to be good at policymaking. They must now also be good at communication. And they have to do it without a real rulebook. You can see why Greenspan preferred to be gnomic rather than clear: it makes it easier to avoid inadvertently saying something that may, in Greenspan’s words, be “misunderstood”, such as the word disinflation.

The solution, however, should not be a return to the days of Fed talk. Rather than imitating Greenspan, the best strategy for central bankers is to simply spell out what they’re thinking and let go of the idea that the right combination of words will move the markets in the perfect direction.

Yesterday, after all, Powell did a great job of explaining that the Fed was not confident that it had inflation under control, that it was sticking to its 2% inflation target, and therefore , it planned to continue raising interest rates. But that didn’t matter: after briefly falling in response to his comments, the market rallied sharply and by the end of the day was up more than a full percentage point. Sometimes the market just hears what it wants to hear.

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