Spare a thought for Fed’s Jerome Powell

Federal Reserve Chair Jerome Powell is an experienced central banker and won’t be surprised at the rough reception he’s been getting lately from analysts and commentators. This kind of treatment is traditional, almost mandatory, for a recently appointed Fed chief. Nonetheless, it shows he’ll have his work cut out in nudging the Fed towards the approach to monetary policy he favors.
In December the Fed raised its benchmark interest rate by a quarter of a point – a move long advertised and widely expected. The stock market decided to take it badly, and Powell’s judgement, after the fact, was questioned.
That reaction, together with economic conditions and everything Powell had said since December, meant nobody was expecting another rise last week. The Fed duly delivered no increase. But it modified its language about what it might do later this year, emphasising the need to be “patient.” This too had been floated ahead of time, should have caused no surprise, and amounted in substance to not much – but the new wording was greeted as an “abrupt U-turn,” a “breathtaking pivot,” and the start of a whole new policy cycle.
So the verdict in many quarters is that Powell doesn’t know what he’s doing. He isn’t sure whether to tighten or loosen. One minute he says this, the next he says that. He’s either responding to market turbulence when he shouldn’t, or failing to respond when he should. Whatever, he’s all over the place and has a pretty serious communication problem.
Under Powell, there’s been no perceptible change in the way the Federal Open Market Committee weighs evidence about the state of the economy and the appropriate level of interest rates given that evidence. This could change, but right now, that’s the main thing to say. Unfortunately, there are very few clicks or consulting fees in telling the world, “Not much to see here, move along.” It’s necessary to come up with a more arresting take, even if it means looking at Fed statements and fainting over the difference between “almost” and “nearly.”
A huge fuss has been made of the change in the Fed’s policy statement from saying in December, “Some further gradual increases in the target range for the fed funds rate will be consistent with sustained expansion of economic activity…” to saying last week “…the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This is a significant amendment, I grant you, and certainly intended to send a message.
I’ll come to the content of that message in a moment. But note first that the December statement was meant in part as justification for that month’s rate increase; the implication was that more might be needed later, but there was nothing resembling a commitment to it. And notice that the Fed could have thought both those statements were true in December and still think both are true now. The two positions aren’t actually inconsistent.
The presumption that the Fed knows more than it’s letting on is why its statements are scraped for clues about its hidden understandings, secret intentions and perplexing inconsistencies. In fact, when it comes to interest rates, the Fed doesn’t have any plans, confidential or otherwise. What will the policy rate be in six months? It doesn’t know. The dot plot, contrary to rumor, doesn’t say. The Fed has no more confidence in where monetary policy is headed than you or I do.
Powell is right to want to get away from overly specific “forward guidance,” not least because the Fed – unless it’s making clear commitments – can’t honestly offer any. Worse, investors, analysts and commentators are predisposed to misunderstand. They think that small perturbations in words about policy are breathtaking pivots, that “could” means “will,” possibilities are probabilities, high probabilities are promises, and the Fed knows more about the future than everybody else.
—Bloomberg
Powell seems to think that more appearances and explanations will help his audience to understand what the Fed knows and doesn’t know, and hence the case for wait and see. In future he’s intending to do more press conferences, for instance, one after every FOMC meeting. I wish him luck. If the past few days are any guide, I think he might regret it.
—Bloomberg