MNI: Fed Messaging Swings Boost Policy Volatility-Ex-Officials

The Federal Reserve’s embrace of transparency over the last two decades has made market expectations for monetary policy more volatile, making it more difficult for the central bank to reach its goals by causing swings in financial conditions, former Fed officials and staffers told MNI.

"There has been a revolution in Fed communications, at least in the way it's been implemented. Conceptually, I have fully supported that but it turns out that it is far from making it easier for the market and economic actors to understand the Fed," said Randal Quarles, a former Fed governor and vice chair for supervision.

Over the past 25 years or so the Fed has increased the frequency of its communications with the public, including through more speeches, question and answer sessions, or media appearances. In some instances, these can surpass 20 in a week.

"It may have actually made it harder, because you've got a cacophony of voices and data changes. It's very hard to convey a message to 330 million people when the Fed may actually talk too much," said Quarles. "Maybe it was better when the wizard was not home," he said, referring to most of the Fed's history when it was tight-lipped about its actions.

TRANSPARENCY

While speeches by the Fed chair have long been scrutinized, the shift toward transparency, first embraced by former Chair Ben Bernanke and also by his successors Janet Yellen and the current chair, Jerome Powell, has increased attention on the speeches of regional Fed presidents in particular, bulking up the weekly schedule of U.S. central bank speak.

Kevin Warsh, an ex-Fed Board governor, told MNI’s FedSpeak Podcast he's for increased transparency but more monetary policy guidance isn't useful.

"Who could be opposed to Fed transparency? If that means the Fed is upfront with the Congress and the American people about their roles, responsibilities and their objectives, then I am all for that," he said. But "the more we tell the world about what we're going to do, the more that financial markets react to that and the more difficult it is for us to change our minds.”

"It strikes me as unuseful to the proper conduct of policy for them to be so transparent," he added. (See: MNI POLICY: G20 CenBanks Worried By Optimistic Rates Markets)

Ellen Meade, a former special adviser to the Fed Board who worked primarily on monetary policy and communications, said the amount of communications often makes it difficult to decipher the consensus message.

"There's been a lot of Fed speak and it does make it hard to sort through and see what is the central voice. If Chair Powell gives a speech then you know that's the central voice, but then there are a lot of other voices around that and it's hard to assess," she said.

"It's a lot less clear than it seems compared to sitting inside the Washington institution where you know where everyone sits on various issues," said Meade, who spent 25 years at the Board of Governors and played a key role in the Fed's 2020 framework overhaul.

2% GOAL

The Fed's current dilemma is how to reduce nominal interest rates in order to keep real rates steady and prevent overtightening, without overplaying its hand and signaling easing too soon, said ex-Richmond Fed economist Peter Ireland, who maintained that more communications helps audiences understand the FOMC consensus and the balance of risks. (See MNI INTERVIEW: Forward Guidance Key Tool However It is Called)

But the range of issues officials discuss has expanded considerably and seems to distract from messages about the Fed's main goals, he said.

"The FOMC has come a long way in making its communication strategy more explicit and useful, but the guidance should be outcome-based and reiterate that the Fed remains committed to the long run 2% target," he said. "So long as we see the intermediate trend in inflation heading back to 2% that means policy is on track towards achieving the goal, but it also means real interest rates are going up and that policy is getting tighter."