All good things in moderation: Fed communication needs a reboot

Communication policy is a powerful tool for the Fed, but it's become overpowering. Hearing from the Fed is a good thing, but too much of a good thing is not good.

I spoke last night at the CFA Society of Oklahoma’s annual dinner. That side-by-side photo was on my slide titled “Scars from the 1970s loom large at the Fed.” My host, Steve Wyett, at the Bank of Oklahoma Financial, offered another observation: the communication seachange at the Fed.

We’ve come a long way, baby.

Then Fed Chair Paul Volcker, on the left, testified before Congress, likely at the twice-a-year Humphrey Hawkins hearing—that Congress began in 1978 for Fed accountability. In addition to being a badass smoking a cigar in Congress, that was one of Volcker’s few speaking engagements. The Volcker Fed did not even announce when they massively hiked the federal funds rate (by targeting the money supply). People had to ‘figure it out,’ which in this case was not hard given the reaction of market rates. That was standard practice for many years.

Now Fed Chair Jay Powell, on the right, is shown speaking at a press conference after an FOMC meeting. Ben Bernanke, as Chair, started the press conferences, which were an addition to the public statements after the FOMC meeting that began under Greenspan. Bernanke and then Janet Yellen held them after every other meeting. Powell switched to every meeting. The Summary of Economic Projections with the infamous dot plot rounds out (every other) FOMC Day. I have longstanding concerns with the dot plot, and if I were ‘Fed Chair for the Day’ (shudder), I would start by banishing the dot plot and SEP, at the very least, from the public.

The radically more transparent FOMC Day is only the tip of the iceberg in the evolution of Fed communications, which has become a firehose of Fedspeak. Within any given week—except during the blackout before the FOMC meetings—several of the 19 Fed officials give speeches, participate in panels or fireside chats, and do press. And sometimes, there are upwards of five or more officials in one day.

Why is it especially problematic now, in addition to a waste of time? Powell has repeatedly stated that the Fed needs more good inflation data to become confident enough to cut rates. We are living in a hyper-data-driven monetary policy moment. I wrote about its pitfalls, but it has a logic to it.—logic demands internal consistency.

Fedspeak is out of control.

If you want more data and do not have a crystal ball for the next eight months of inflation prints this year, then your forecasts of what you might or might not do by the end of the year are basically irrelevant. Unfortunately, markets hoover up each scrap from Fed officials. Fed words are creating volatility and are a risk to the economy.

Here are a handful of recent examples from Fed officials. The tweets show the pull quote takeaways. I also note what is problematic with the words. These are examples; I do not intend to single out individual Fed officials.

• Mixed messages, especially from the same Fed official, cause confusion. This is particularly difficult when no new data have come out between the statements. In the worst case, it can swing markets in different directions within days. In the best case, it washes out.

• Spitballing about decisions through the end of the year gives a false sense of certainty. Core PCE inflation is less than one percentage point of the 2% target, and we have several months of inflation data between now and the end of the year. Comments like this one—without any of that data—have helped price in a market consensus of one cut and, increasingly, none in 2024.

• ‘What if’ games are risky. Policymakers must think through counterfactuals, but they should be careful sharing them in public. Of course, the Fed will raise rates if inflation surges back. Duh. Why spook markets by talking about it?

I could go on and on, but I think you get the point.

As I said to Bloomberg this week, market participants are listening to what they want to hear. Swinging within three months from six or seven cuts priced in for 2024 to one or zero is outrageous. I don’t pin that entirely on the Fed, especially not on Powell. However, don't open your mouth if you don’t want people to misunderstand you or use your words out of context. Fed officials are not some random group of talking heads. They have immense independence for critical decisions this year.

What is a Fed watcher to do?

How do I deal with the Fedspeak firehouse? I listen to or read everything Powell says. He speaks for the FOMC and leads it. Then, I pay attention to Governor Chris Waller. He often prepares the way for Powell on monetary policy. Plus, as a macroeconomist, I find him thought-provoking. Anyone interested in the balance sheet should follow Dallas Fed President Lorie Logan. Even though she is not a voting member, she is the point on the balance sheet. One of Powell’s virtues as Chair is turning to the subject matter experts.

After that, I do my work and tune them out. I have a few other Fed officials who I read or listen to, but even with them, it’s sporadic. There are only so many hours in the day, and again, the data are driving. My time is better spent with the CPI handbook and following all the secondary input data releases. I know more about Owner’s Equivalent Rent and, more recently, motor vehicle insurance than I thought possible.

In closing.

Always saying what’s on your mind is not a virtue. I know. A filter avoids overwhelming or confusing others and gives you flexibility if the world throws you a curve ball—and the world is full of curve balls.

Communication and transparency are essential at the Fed. The Humphrey-Hawkins hearings and the accompanying Monetary Policy Report are important. Testifying regularly before Congress in public is essential to the Fed’s accountability. The press conferences after every FOMC meeting are also important. The Chair expands on the FOMC’s thinking and answers questions from journalists who write it up for regular people. The Chair channeling and explaining the FOMC is extremely helpful.

On balance, the communication policy in the Powell Fed is a big step forward from the Volcker Fed. However, the current state of play threatens to undermine the Fed’s policy goals. Divergent views among Fed officials are healthy and to be expected; however, they have turned into a mess in public and do not inspire confidence.