MNI POLICY: Market Expctns May Be At Odds With Fed-Boston Conf

By Sara Haire

     WASHINGTON (MNI) - Former Fed Vice Chair Roger Ferguson Jr. suggested

Friday at a Boston Federal Reserve confercent that market expectations about the

future pace of regime changes in terms of monetary policy may not be congruent

with the Fed's projections.

     Markets right now are pricing in two more rate hikes for 2018, but some

participants are starting to expect the Fed to begin cutting rates in 2020,

something the Federal Reserve has not projected. 

     Ferguson, now president and CEO of TIAA, told the conference that the

markets have gotten it right in the past about projected monetary policy and

this could happen again.

     This raises the issue of whether the Federal Reserve should react to

markets and their expectations or continue to be as transparent with their

intentions and expect the markets to adjust accordingly.

     Ferguson explained that "when the regime starts to change," whether markets

and central banks are "all aligned around the change in the regime" could be a

challenge in the future.

     "The Fed may take actions that may surprise markets [...] then get a rapid

adjustment in asset prices or adjustments," said Ferguson.

     Citigroup's Global Chief Economist, Catherine Mann, said that the market

may be expecting the Fed to capitulate to the market expectations. Ferguson

quickly dashed the use of the word "capitulate" when referring to the Fed's

adjustments in their projections given that markets have adjusted their

expectation about monetary policy to meet the Fed's in more recent history.

     Cleveland Fed Bank President Loretta Mester, who was moderating the panel,

chimed in to explain that if there is a market shock, then the Fed is not doing

a good job at communicating because there should not be a surprise to the

markets.

     Mester also explained that the Fed should react and move their dot plot

around given the uncertainty in the economy, and that you should "want your

central bank to be taking that on board."

     Transparency has been a key component to Jay Powell's tenure as Fed Chair

so far. In his first press conference in June as Fed Chair, Powell announced

that press conferences would follow every meeting starting in January and not

just the ones that are quarterly.

     The premise of whether the Fed should react to market expectations could

prove to be a source of contention into the future as the Fed continues to try

to be more transparent in order to avoid a repeat of the 2013 taper tantrum.

     Several market participants have recently said that the Fed Chair Powell

has been great at not disturbing markets and being as transparent about monetary

policy as possible. This should encourage that markets to take the Federal

Reserve at its word given the emphasis on transparency.

     However, Atlanta Fed Bank President Raphael Bostic may have thrown a wrench

in that sentiment when he said on August 20 in Tennessee that "the market is

going to do what the market does, and we have to pay attention and react."

     As the Fed continues to remove accommodation gradually, there will be a

closer watch on whether monetary policy reacts to markets or whether the Fed

will heavily telegraph policy and hope the markets adjust. 

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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