Powell Needs to Watch His Language

(Bloomberg Opinion) -- A lot is expected of Jerome Powell’s speech on Friday at the annual Jackson Hole symposium on central banking. Too much, in fact.

The Federal Reserve chairman has to contend with heightened uncertainty about the economic outlook, an impaired set of monetary-policy instruments, mounting confusion due to assorted communications glitches, and, not least, a steady stream of intemperate and unhelpful criticism from the White House. With all that going on, nothing Powell says in his speech will settle investors’ nerves.

Is Trump’s constant heckling really a problem? The Fed is free to ignore it, after all, and Powell and other officials promise to do just that. But it isn’t so easy. Trump’s harassment and calls for lower rates unavoidably introduce additional uncertainty. Maybe the Fed will buckle under pressure, cutting interest rates again even if its projections argue against; or maybe it will hesitate to cut, even if it considers lower rates advisable, because it doesn’t want to be seen as giving way.

This extra measure of doubt subtracts from the efficacy of monetary policy. It’s a needless burden on the economy. And it’s why presidents before Trump largely left the central bank in peace to do its job. The easiest way to improve the conduct of monetary policy would be for President Trump to stop challenging the Fed’s independence.

Powell can’t do anything about that, of course — but he can think about his own approach to communication. His best bet for now might be to say less, not more. The Fed’s recent communication problem arises from too many hints, clues and messages that just don’t hang together.

In successive statements, press conferences and recent congressional testimony, Powell has failed to set out a consistent line of analysis. For a time, the theme was: Be patient, wait and see. Then the chairman seemed to suggest that interest rates had been too high for some time, not because something had just changed. Then he said a cut was needed as insurance against things that hadn’t happened yet, but might before long. Investors wanted to know whether the recent cut in interest rates was the first of several, reflecting a significant shift in the Fed’s assessment, or a mere technicality, a so-called mid-cycle adjustment. At different times, Powell has implied both.

Granted, market analysts are paid to find deep significance in everything Powell and his Fed colleagues say. Sometimes, in the search for novelty, they seem determined to misunderstand. And Powell deserves credit for at least trying to explain what the Fed thinks it’s doing. (One of his most illustrious predecessors, Alan Greenspan, took care to make his statements unintelligible.) But the effort to be more forthcoming is not going well. Inconsistencies in the central bank’s messaging aren’t all in the minds of market pundits. Investors are confused partly because the Fed itself seems confused.

Up to a point, this is unavoidable. At the moment, the outlook is perplexing, and there’s no simple story for the central bank to tell. At such times, however, “just keep talking” is bad advice. Former Treasury Secretary Lawrence Summers said it well: “The Fed keeps overconfidently predicting the future of an unpredictable economy.”

A thorough review of the Fed’s monetary-policy goals and methods is under way, and Powell’s speech is likely to give a sense of where that’s heading. For the moment, though, when it comes to explaining changes in interest rates and signaling future adjustments, Powell’s earlier approach to communication looks wise: Wait for the data, keep an open mind, and see what happens.

Editorials are written by the Bloomberg Opinion editorial board.

©2019 Bloomberg L.P.