Here’s How Powell Regains Control of the Fed’s Narrative

Powell must re-establish the central bank as a source of market stability, not volatility.

Mohamed A. El-Erian

07 Jan 2019, 06:41 AM IST

Here’s How Powell Regains Control of the Fed’s Narrative

Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

(Bloomberg Opinion) -- Using words to influence people’s behavior — technically known as policy guidance — is key to the Federal Reserve’s ability to deliver on its dual mandate of maximum employment and stable prices. Yet the effectiveness of the central bank’s communications strategy has taken a hit in the last few weeks. Chair Jerome Powell has a golden opportunity on Friday to advance the process of regaining the narrative.

It’s not that the Fed pronouncements matter less these days. They remain as important and influential. What has changed is their impact on volatility. Rather than help counter and contain unsettling market moves, many now worry the Fed has been fueling them and, with that, inadvertently contributing to a market selloff that could undermine economic growth and longer-term financial stability.

There is a long list of people second-guessing the Fed’s policy approach, and not just any people: from the president of the United States to influential market participants, including top hedge fund managers. The central bank’s communication efforts have also suffered. As an example, shortly after the Federal Open Market Committee policy meeting in December, New York Fed President John Williams had to clarify what Powell had stated at a news conference just two days earlier.

When he speaks at the annual meeting of the American Economic Association on Friday, Powell has an opportunity to advance the process of regaining more control over the Fed’s narrative. To do so, he could consider a three-point message to markets and politicians.

First, that the U.S. economy remains solid, underpinned by strong job creation and wage growth, which should be confirmed by the monthly jobs report for December that will be released before his panel appearance; but the balance of risk has undoubtedly shifted more to the downside, as the weaker-than-anticipated ISM numbers on Thursday made clear.
Second, that the Fed is sensitive to the possibility of spillovers from volatile markets contaminating the health of the U.S. economy, and to potential spillbacks from economic weakness internationally.
Third, that all of the Fed’s policy tools are on the table, including the possibility of taking its balance-sheet reduction off autopilot.

When your words are meant to be influential, and when they are an integral part of your brand, there are few things worse than losing control of your narrative. Through appropriately crafted messages in these three areas, the Fed has an opportunity to address this problem.

Success would be part of a process, not instantaneous. It won’t alter what I and others have been warning is the almost inevitable bigger reality of central banks having gone from repressors of volatility to contributors. Nor will it change the other inconvenient reality for central banks that they find themselves in this position largely due to factors beyond their control. But success would help reduce the risk of a policy mistake, especially one that could be forced on the Fed by the words and actions of others.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. His books include “The Only Game in Town” and “When Markets Collide.”