Fed, speak softly and carry a big stick — you will go far

The Fed holds the keys to the global economy, and must choose its words more carefully. Its large, rapid rate hikes have made financial markets fragile. Words matter.

The Fed must get its communication policy under control. Financial markets, more than ever, need clarity, not confusion. Last Friday was the first day out of the FOMC meeting blackout, with four Fed officials speaking in public. Their words whipped markets around all day. That’s unacceptable and dangerous.

Today’s post shares some real-time headlines. Remember, the judge of communication policy is what the audience hears, not what the Fed wants them to hear.

Tom Barkin (non-voting until 2024)

First, Tom Barkin, the President of the Federal Reserve Bank of Richmond, on CNBC:

Nick Timiraos @NickTimiraos

Richmond Fed President Tom Barkin tells @steveliesman it's conceivable the Fed could raise rates to 5% next year. He says there's a case for "a slower pace of rate increases, a longer pace of rate increases and potentially a higher endpoint."

cnbc.comJobs report shows labor market remains tight, says Richmond Fed President Tom BarkinTom Barkin, Richmond Fed President, joins ‘Squawk on the Street’ to discuss the tight labor market, how firms are handling price increases, and equity markets pricing in rate changes.

Jeanna Smialek @jeannasmialek

President Barkin from the Richmond Fed tells @steveliesman that it's "entirely conceivable" that rates could go above 5%. "To me, that's not a plan, that would be an output of our efforts to keep inflation under control," he says. "We have to get inflation under control."

Barkin, throughout the interview, could be interpreted in myriad ways. That causes uncertainty. Here’s what Fed Chair Jay Powell said two days earlier at the FOMC press conference about how high the Fed would raise the federal funds rates, referred to as the “terminal rate.”

CHAIR POWELL. … how high to raise our policy rate, and we're saying that we'd raise that rate to a level that's sufficiently restrictive to bring inflation to our 2 percent target over time and we put that into our post-meeting statement because that really does become the important question we think now, is how far to go and I'll talk more about that. We think there's some ground to cover but before we meet that test and that's why we say that ongoing rate increases will be appropriate, and as I mentioned, incoming data between the meetings, both a strong labor market report but particularly the CPI report, do suggest to me that we may ultimately move to higher levels than we thought at the time of the September meeting. [The median forecast from participants for the peak rate then was 4.6%.] That level is very uncertain though, and I would say we're going to find it over time.

Listen to Powell. He and he alone speaks for the FOMC.

Moreover, no one on the FOMC, including Barkin or Powell, should be giving numeric guidance. The Fed says it’s data-dependent. There is an incredible amount of data coming. In addition, 5% is a special number since it is the market’s consensus forecast for the terminal rate. It is not the Fed’s job to confirm Goldman’s forecast. Lastly, keep in mind that Barkin is not voting on monetary policy this year or next.

Susan Collins (voting through December)

Next, Susan Collins, the Federal Reserve Bank President of Boston, spoke at the Brookings Institution.

Nick Timiraos @NickTimiraos

Boston Fed President Susan Collins suggests she is ready to slow the pace of Fed rate increases from here. Fifty basis points used to be a large move, she says. She says it's too soon to say how high rates will need to go.

“In my [Collins’] view …” Again, Powell is the only person who speaks for the FOMC. Every other Fed official shares their own opinion. It’s essential to debate around the FOMC table; it’s problematic in public, especially with fragile markets. Unlike the other three Fed officials who spoke on Friday, Collins is a voting member. She has one more vote to cast, one of 12 FOMC members.

Prepared, vetted speeches are a controlled way to reinforce messages from Powell and the FOMC. The informal Q&As, as Collins’ with David Wessel, are riskier:

Iris Choi @donutsdidthis

5/ Boston Fed President Susan Collins said Friday, “the earnings numbers in these data are still not consistent with 2% inflation. There’s clearly more work to do there.”

Why are Collins and other Fed officials doing quick takes on wage [average hourly earnings] data that the Bureau of Labor Statistics published just hours before? Wage growth is central to the Fed’s current rate policy, and individuals should be cautious in how they discuss it in real time. Markets react to such comments in ways that could work against the Fed’s goals, especially if it creates more fragility.

Charlie Evans (non-voting, retires early 2023)

Charlie Evans, the Federal Reserve Bank President of Chicago, spoke with Reuters. The following three tweets show that the messages can be interpreted differently, even from one official in one interview.

Ann Saphir @annsaphir

Even with a Fed switch to half-point hikes per meeting, ⁦@ChicagoFed chief⁩ sees ample capacity to raise rates fast if needed

reuters.comFed’s Evans says smaller rate hikes make sense, front-loading doneIt is time for the Federal Reserve to shift to smaller interest rate hikes to avoid tightening monetary policy more than needed, and slow the pace further once risks become more “two-sided,” Chicago Fed President Charles Evans said on Friday.

Derek Tang @macroderek

@annsaphir interviews Chicago Fed President Evans. "If it were the case that the Committee still saw the need to increase rates expeditiously, because inflation reports weren't as favorable as we would like, you can do 50s, repeatedly."

reuters.comFed’s Evans says smaller rate hikes make sense, front-loading doneIt is time for the Federal Reserve to shift to smaller interest rate hikes to avoid tightening monetary policy more than needed, and slow the pace further once risks become more “two-sided,” Chicago Fed President Charles Evans said on Friday.

Breaking Fed News @BreakingFedNews

Fed's Evans says smaller rate hikes make sense, front-loading done - Reuters

news.google.comFed’s Evans says smaller rate hikes make sense, front-loading doneIt is time for the Federal Reserve to shift to smaller interest rate hikes to avoid tightening monetary policy more than needed, and slow the pace further once risks become more “two-sided,” Chicago Fed President Charles Evans said on Friday.

Markets broadly read Evans as dovish: front loading is done, and it’s time to slow to 50 basis point increases. However, some picked up on the terminal rate above 5%. That may be his opinion, but he has no vote and retires early next year.

Also, let’s go back to Powell at the FOMC press conference:

… at some point it will become appropriate to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made. It is likely we'll have a discussion about this at the next meeting, a discussion. To be clear, let me say again, the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restricted, which really will be our principal focus.

A “discussion at the next meeting.” Nothing suggests that frontloading is done. We have weeks before that meeting. Fed officials following Powell in two days with direct contradictions in public is confusing and, for non-voting members, pointless.

Neel Kashari (voting in 2023)

Last up on Friday was Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, who spoke with the Associated Press:

Breaking Market News ⚡️ @financialjuice

FED'S KASHKARI: THE STRONG US JOBS REPORT FOR OCTOBER DEMONSTRATES WHY THE FEDERAL RESERVE NEEDS TO KEEP RAISING INTEREST RATES HIGHER THAN PREVIOUSLY FORECAST IN ORDER TO KEEP INFLATION UNDER CONTROL.

The Associated Press @AP

The solid U.S. jobs report for October underscores why the Federal Reserve needs to raise interest rates higher than it had previously forecast in order to control inflation, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said.

apnews.comFed’s Kashkari: Jobs report shows why more rate hikes neededWASHINGTON (AP) — The solid U.S.

Again, more chatter on Jobs Day. There are two CPI reports and one more Jobs Day before the December vote. Why make such bold predictions now? Be data-driven; all data. Kashkari is a voting member next year when the Fed will presumably reach its terminal rate. His words can be especially unsettling to markets now.

Wrapping up

Last Friday was an overload of Fed. It was risky and counterproductive.

Financial markets are too fragile to absorb that much Fedspeak in one day, especially when contradictory and confusing. The stock market whipped around as Fed officials spoke. Directly after an FOMC meeting. Fed officials should not be rushing out to stake their personal opinions.

I do not want to silence anyone. We need robust debate. I am simply asking on behalf of the world and financial markets that the Fed choose its words more carefully. It must communicate clearly and strategically as an institution. Let Powell deliver and control the message, as he said at the presser:

We have a ways to go. And the last thing I'll say is that I would want people to understand our commitment to getting this done. And to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon. So those, I control those messages and that's my job.

And it’s time to stop raising rates. Otherwise, the Fed will break something.

Addendum:

Fed officials will continue to chatter. So, here's who to listen to:

1) FOMC statement + Powell presser (together!)

2) Powell's speeches

3) Brainard's speeches

That's it unless you have a very good Fedspeak decoder ring. If you can't help yourself and want to watch Fedspeak 24-7, then largely ignore non-voters.