Spare a Thought for Jerome Powell
(Bloomberg Opinion) -- Federal Reserve Chair Jerome Powell is an experienced central banker and won’t be surprised at the rough reception he’s been getting lately from analysts and commentators. This kind of treatment is traditional, almost mandatory, for a recently appointed Fed chief. Nonetheless, it shows he’ll have his work cut out in nudging the Fed toward the approach to monetary policy he favors.
In December the Fed raised its benchmark interest rate by a quarter of a point — a move long advertised and widely expected. The stock market decided to take it badly, and Powell’s judgement, after the fact, was questioned.
That reaction, together with economic conditions and everything Powell had said since December, meant nobody was expecting another rise last week. The Fed duly delivered no increase. But it modified its language about what it might do later this year, emphasizing the need to be “patient.” This too had been floated ahead of time, should have caused no surprise, and amounted in substance to not much — but the new wording was greeted as an “abrupt U-turn,” a “breathtaking pivot,” and the start of a whole new policy cycle. My colleague John Authers called it “about as drastic a reversal as a central banker could possibly pull off within six weeks.”
(Two days later, by the way, I was reading: “Data revives speculation that Fed may lift interest rates further despite recent dovish tone.”)
So the verdict in many quarters is that Powell doesn’t know what he’s doing. He isn’t sure whether to tighten or loosen. One minute he says this, the next he says that. He’s either responding to market turbulence when he shouldn’t, or failing to respond when he should. Whatever, he’s all over the place and has a pretty serious communication problem.
Well, as I say, this is standard onboarding procedure for new Fed chairs — and this narrative of the stumbling novice, in my view, is mostly nonsense.
Under Powell, there’s been no perceptible change in the way the Federal Open Market Committee weighs evidence about the state of the economy and the appropriate level of interest rates given that evidence. This could change, but right now, that’s the main thing to say. Unfortunately, there are very few clicks or consulting fees in telling the world, “Not much to see here, move along.” It’s necessary to come up with a more arresting take, even if it means looking at Fed statements and fainting over the difference between “almost” and “nearly.”
All right, I exaggerate — but not much.
A huge fuss has been made of the change in the Fed’s policy statement from saying in December, “Some further gradual increases in the target range for the fed funds rate will be consistent with sustained expansion of economic activity…” to saying last week “…the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.” This is a significant amendment, I grant you, and certainly intended to send a message.
I’ll come to the content of that message in a moment. But note first that the December statement was meant in part as justification for that month’s rate increase; the implication was that more might be needed later, but there was nothing resembling a commitment to it. And notice that the Fed could have thought both those statements were true in December and still think both are true now. The two positions aren’t actually inconsistent.
In part I’m sure the Fed did want to acknowledge the gathering downside risk to its forecasts, as other forecasters have done. The data-dependent policy that Powell keeps talking about needs to be, you know, dependent on data. Things change, and the Fed is probably a bit less confident now than it was six weeks ago that another quarter- or half-point increase in rates this year will be appropriate. But in addition Powell is striving to underline “patience” in its own right. These are highly uncertain times, he’s saying, with many cross-cutting influences at work — so let’s wait and see what the data tell us.
Attention to data and open-minded agnosticism about future interest rates seem to me the right approach — almost always, and especially now. But even though much of the criticism of Powell is undeserved, there are two big problems with Powell’s thinking.
First, markets don’t do patience: They’re hard-wired to jump to conclusions, and that isn’t going to change. Second, there’s a great reluctance on the part of investors and analysts to accept that the Fed, looking forward, might be rationally agnostic — to believe that the central bank knows roughly as much about what lies ahead for the economy as anybody with a Bloomberg terminal.
The presumption that the Fed knows more than it’s letting on is why its statements are scraped for clues about its hidden understandings, secret intentions and perplexing inconsistencies. In fact, when it comes to interest rates, the Fed doesn’t have any plans, confidential or otherwise. What will the policy rate be in six months? It doesn’t know. The dot plot, contrary to rumor, doesn’t say. The Fed has no more confidence in where monetary policy is headed than you or I do.
Powell is right to want to get away from overly specific “forward guidance,” not least because the Fed — unless it’s making clear commitments — can’t honestly offer any. Worse, investors, analysts and commentators are predisposed to misunderstand. They think that small perturbations in words about policy are breathtaking pivots, that “could” means “will,” possibilities are probabilities, high probabilities are promises, and the Fed knows more about the future than everybody else.
Powell seems to think that more appearances and explanations will help his audience to understand what the Fed knows and doesn’t know, and hence the case for wait and see. In the future he’s intending to do more press conferences, for instance, one after every FOMC meeting. I wish him luck. If the past few days are any guide, I think he might regret it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Clive Crook is a Bloomberg Opinion columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic.
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