The Fed's Tower Of Babel

There was a profusion of communications and opinions from the Federal Reserve last week. The challenge now is to try to make sense of it all.

The first thing that caught my attention was the release of a survey conducted by the New York Fed measuring how well the Fed communicates its intentions to market makers. It didn’t do so well.

The bank found that a majority, or 15 out of 24, of the primary dealer banks that bid on U.S. Treasury debt auctions and make a market in government securities found the Fed’s communications prior to its July 31 decision to lower interest rates to be “ineffective” or close to it. “Several dealers indicated that they found communication confusing, and several characterized communications from various Fed officials as inconsistent,” the New York Fed said.

A similar survey of money managers found only slightly better results, with exactly half, or 14 of 28, giving the Fed “low grades for communications effectiveness.”

Then, at the Kansas City Fed’s annual “symposium” in Jackson Hole, Wyoming, Athanasios Orphanides, a professor at MIT, released a paper including suggestions on how the Fed can improve how it communicates its policy-making process. While the paper commends the Fed for increasing the amount of information it provides to the public over the past three decades – it surely has – there’s room for improvement in how it communicates that information. Specifically, Orphanides recommended that Fed members provide more details about their confidence or uncertainty in their various economic projections and how those might change given different scenarios or over time.

While all of the information the Fed already provides, and the prospect of more, is good in theory, the problem is that the Fed is providing too much information, which is creating more confusion and uncertainty, rather than less, about exactly where it stands collectively, while businesses, investors and consumers crave simple guidance on the direction of future Fed policy so they can make more intelligent decisions.

It’s like when you go to the pharmacy and try to buy a bottle of cold medicine. The other day I did that and was so confused by the number and variety of choices – one for a cold, one for the flu, one for a cold and flu, one for mucus, one with a decongestant, one with an antihistamine – that I walked out of the store frustrated and empty-handed.

Last week’s Jackson Hole confab produced a cacophony of words, ideas, and views by various Fed monetary officials which no doubt created even more uncertainty about where the Fed stands and what its next move might be.

Before the symposium, the markets may have been forgiven for thinking that the July rate cut may be the last one for a while. The minutes of the Fed’s July 30-31 meeting, released the day before Jackson Hole, called the rate cut a “recalibration” rather than the beginning of more to come.

“Most participants viewed a proposed quarter-point policy easing at this meeting as part of a recalibration of the stance of policy, or mid-cycle adjustment, in response to the evolution of the economic outlook over recent months,” the minutes said, which Fed Chair Jerome Powell reiterated at his post-meeting press conference then.

At Jackson Hole, however, Powell appeared to have a change of heart, expressing greater concerns about international trade. He “didn’t push back against market expectations of a rate cut at the Fed’s Sept. 17-18 meeting, and he left an open door to providing more stimulus after that,” the Wall Street Journal reported.

Fed members were also divided at Jackson Hole about where they see the next move in monetary policy, just as they apparently were at the July FOMC meeting.

On the more hawkish side, Kansas City Fed President Esther George, who voted against the July rate cut, maintained that stance last week.

“My sense was we’ve added accommodation, and [the rate cut] wasn’t required in my view,” she said on CNBC. “With this very low unemployment rate, with wages rising, with the inflation rate staying close to the Fed’s target, I think we’re in a good place relative to the mandates that we are asked to achieve.”

Philadelphia Fed President Patrick Harker, who is not currently a voting member of the FOMC, agreed with that assessment. “I think we should stay here for a while and see how things play out,” he said.

A few days prior to Jackson Hole, Boston Fed President Eric Rosengren, who also voted against the July cut, told Bloomberg Television that cutting rates “is a bigger risk to encourage people to take on too much more risk at this time. Global conditions are weak. So I’m not saying there aren’t circumstances in which I would be willing to ease. I just want to see evidence that we are actually going into something that’s more of a slowdown.”

On the dovish side, however, Dallas Fed President Robert Kaplan, also a non-voter this year, acknowledged that “cutting rates hurts savers, it pushes people to take more risk, and I’m very cognizant of that,” he said. But “I’m also cognizant if we wait till we see weakness in the consumer to take action, we’ve probably waited too long.”

So, what’s the Fed’s next move? Your guess is as good as anyone's.

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George Yacik
INO.com 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 INO.com) for their opinion.