The Fed Is Taking Off the Training Wheels
(Bloomberg Opinion) -- The training wheels are coming off.
Step by step, Federal Reserve Chairman Jerome Powell is diminishing the importance of some of the Great Recession-era totems that were aimed at guiding investors, consumers and executives about what the Fed was anticipating doing and when it might do it. The message is that we don’t need them so much anymore.
The Federal Open Market Committee on Wednesday ceased describing its stance as “accomodative,” seen in the moment as indicating officials are closer to a point where borrowing costs don't juice or brake activity. Viewed from another point, the change could be construed as an admission they don't know where that point is, other than that it's coming up sometime.
But this isn't so much about what the Fed said on Wednesday. It's a broader point about how Powell is approaching his role and the changes the Fed has instituted since he took the helm in February. In isolation, the adjustments look small. Taken together, they show a departure from his two immediate predecessors, Janet Yellen and Ben S. Bernanke. (Powell served as a Fed governor under both.)
We are talking about a more humble Fed, one less enthusiastic about grand pronouncements on where measures of the economy are headed or elaborate frameworks for setting policy. There was a telling line in the minutes of August's FOMC meeting about whether the Fed can fairly convey the level of neutral interest rates – ones that neither spur nor limit growth: “Continuing to provide an explicit assessment of the Federal Funds Rate relative to its neutral level could convey a false sense of precision.”
A few weeks later at the Fed's Jackson Hole retreat, Powell's speech was almost a tribute to Alan Greenspan's 18 years atop the Fed. Greenspan's approach was instinctive, often on the money, and not transparent. His successor, Bernanke, wanted more democracy at the Fed, to depersonalize decisions. He was a fan of numerical targets to guide the central bank, not whims.
The calamity of 2008, the quantitative easing that followed and heightened scrutiny of the Fed added to the imperative. Not all of the projections made by the Fed have panned out: it was way too optimistic on how soon inflation would reach the target of 2 percent and botched estimates of how far it could raise interest rates when the rest of the world was sluggish. The Fed went into 2015 and 2016 tipping four rate increases each year. It managed just one in each.
This year, a decade since the crash, inflation is a little above 2 percent, the jobless rate is below 4 percent and the length of the American expansion is closing in on a record. It makes sense to dispense with training wheels when the economy is steadily cruising along.
There were signs of a different tack soon after Powell was sworn in. At his first post-FOMC press conference in March, he balked at long explanations of future scenarios. The committee “made, really, one decision at this meeting. And that was to raise the federal funds rate by 25 basis points,” he said. His early congressional testimonies had a “stay in our lane” quality. A few years ago, he came out as a skeptic of dots.
Beginning next year, Powell will have a press conference after every meeting. That might boost transparency or might be used to advance Powell's own perspective, especially if the Fed wants to be steered less by imprecise projections in a vibrant economy.
Regardless of where neutral may be, or whether there are two neutrals – one short term, another for the longer haul as Lael Brainard pondered this month – we are unlikely to see a complex equation laid out in Fed statements.
Adding a complex equation just doesn't seem to be Powell's style. Fair enough. Another way of marking the economy’s progress is to communicate a little less.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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