Silence is Golden

Back in the early 1980s, when I was a young cub reporter fresh out of college covering the bond market for a Wall Street trade newspaper, I used to scratch my head over how traders and investors would try to discern what the next Federal Reserve move would be. Obviously, not much has changed since then.

Back then, however, the Fed rarely said anything, and when it did, its words would be couched in the famous “Fed speak,” in which the chairman – Alan Greenspan was the best (or worst) at it – said a bunch of gobbledygook that few people could understand but spent countless hours trying to decipher.

In my innocence, I asked one of the senior reporters, “Why doesn’t the Fed just tell us what it intends to do instead of making everybody guess?” I don’t remember ever getting a good explanation.

The problem with that type of “communication” – or lack of it – is that investors are prone to make panicky, knee-jerk reactions to whatever the Fed eventually does.

Since then, the Fed, to its credit, has made a real, concerted effort to become “more transparent” in its communications and avoid surprises as much as it can. The process started with Ben Bernanke, and Jerome Powell has really run with it, holding a press conference after every Fed meeting, or 10 times a year, rather than quarterly as his immediate predecessors did. That’s on top of the countless public speeches and congressional appearances he makes, plus those of the other members of the Fed’s Board of Governors and the presidents of the regional Fed banks, those with a vote on monetary policy.

Now, it seems, we’re at the point where the Fed is confusing the markets by having too many voices say too many things, rather than confusing the markets by saying as little as possible. Which situation is better, I’m not sure.

Case in point: Over the past month or so, Powell and at least some of his colleagues have been prepping the market for a cut in the federal funds rate and easier monetary policies in the face of what the Fed believes is weakening economic growth, both in the U.S. and globally, inflation that is too low for the Fed’s liking, and the tariff war with China.

While the Fed took no action at its meeting earlier this month, it did lay the groundwork for a rate cut in the near future, as the market has been anticipating – and demanding – for some time. “The case for somewhat more accommodative policy has strengthened,” Powell said at his post-meeting press conference. The new “dot plot” graph shows nine members now seeing up to two rate decreases by the end of next year.

While that is not exactly a guarantee that the Fed will lower rates soon – possibly this summer – it was enough for the stock and bond markets to rally.

But now Powell has walked that back a little. “We are mindful that monetary policy should not overreact to any individual data point or short-term swing in sentiment,” he said this week. That was echoed by Richmond Fed President Thomas Barkin and Dallas Fed President Robert Kaplan, who both said it was too early to decide whether a rate cut was needed. Those comments depressed a market that had already baked a rate cut – or two – into the cake.

Maybe the Fed is just saying a little too much. Perhaps they’re something to be said for not saying much.

Assuming that the Fed will ease – now less of a given than it was at the beginning of the month, perhaps – will that actually accomplish anything?

The ostensible purpose of a rate reduction is to spur economic growth. But how much more stimulus does the economy really need?

Unemployment is already at record lows. The economy is healthier than it has been in 10 years. Mortgage rates have already come back down to near record lows, but the housing market has yet to benefit. Housing is fighting on other fronts that low mortgage rates probably won’t remedy, namely high prices and a large potential buyer group – millennials – that either doesn’t want to buy a house or can’t afford to.

No, what a rate cut will do is continue to artificially inflate financial asset prices, like stocks and bonds. We’ve already seen that so far in June, as the S&P 500 is up more than 5% so far, nearly erasing the previous month’s steep losses, and yields on Treasury bonds have dropped to their lowest levels in more than two years in anticipation of lower rates.

Is that something to complain about? Aren’t we all benefiting from juiced asset prices, just like Major League Baseball is benefiting from juiced baseballs (and lousy pitchers)?

Maybe we should just relax and enjoy the ride. Unfortunately, I just don’t have a lot of confidence in who’s driving.

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

2 thoughts on “Silence is Golden

  1. President Trump has taught us how to play mind games for manipulating outcomes.

  2. GY: Right ON !

    What ever happened to free markets ?

    I thought free markets generated REAL wealth;
    AND made all the players happy.

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