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Powell Brings Plain-Spokenness to Fed

Powell Brings Plain-Spokenness to Fed
(Andrew Harnik/AP)

By Tuesday, 27 February 2018 07:12 AM Current | Bio | Archive

It’s easy enough to understand how Ivan Pavlov conditioned dogs. But how do you un-train the conditioned? That’s the dilemma facing Federal Reserve Chairman Jerome Powell as he seeks to shift the central bank toward greater transparency than it has provided in recent years.

Investors missed the new policy Fed officials implemented in 2009 as the worst of the financial crisis was still being felt in the aftermath of the Lehman Brothers collapse and pessimism was at acute levels. And yet investors had received a gift of sorts, though they wouldn’t be able to give it a name for another five years, when the transcripts of the December 2008 Federal Open Market Committee meeting were released.

That’s when policy makers voted to take interest rates to the zero bound. In addition, Janet Yellen, who nine months later would be elevated from president of the San Francisco Fed to vice chair of the Fed’s Board of Governors, made a suggestion that would have been considered radical in a corporate setting.

“We could also consider using the FOMC minutes to provide quantitative information on our expectations,” she suggested. “We could reveal the funds rate projections that implicitly accompany our quarterly economic projection.”

Yellen went on to explain that using the minutes as a way to introduce fresh information on the future policy path was advantageous given the extraordinary shift in the environment.

“We did discuss this approach before, and I remember that a number of you were uncomfortable with it,” Yellen added. “But circumstances have changed, and there could be particular value now in adding the federal funds rate to our projections, and in fact, we could consider a trial run.”

Within several years market participants had grown wise to the minutes’ importance; the document had become a conduit in and of itself for policy makers. By the end of Yellen’s tenure, it was no longer unusual for the minutes to incorporate events that had taken place after the original statement’s release, and investors caught on.

The confused market trading after the release on Feb. 21 of the minutes that accompanied the January FOMC meeting was telling. Stocks initially soared, as the market interpreted the minutes as dovish. But equities ended up recording their worst decline of the week by the closing bell. The Dow Jones Industrial Average swung 475 points to close lower by 166 points on the day.

Doubt had entered investors’ minds. What if the minutes did not reflect the reports that the supply of Treasuries was set to double, a nod to news released after the meeting had concluded? What if the minutes failed to capture the so-called volatility tantrum that locked investors into their seat belts for several weeks, again, after the January meeting?

What if the minutes’ dovish tone simply mirrored the world as it was in mid-January? What if the minutes were really what they are meant to be -- brief summaries of what took place at board meetings?

As if to corroborate such a sea change afoot in Fed communications, the release of the Fed Board’s semiannual Monetary Policy Report to Congress on Feb. 23 emphasized that the U.S. financial system remained on stable footing. As for the shaky stock market, the report noted that “price-to-earnings ratios for U.S. stocks rose through January and were close to their highest levels outside of the late 1990s,” before acknowledging that “ratios dropped back somewhat in early February.”

The report went on to recommend that the board increase the transparency of its bank stress tests, including by revealing the models used to estimate losses. This step contradicts the Fed’s long-held policy. In June 2015, Yellen lauded the central bank’s transparency but insisted in a press conference that the models remain secret. Criticism of this closed-door policy has grown in recent years as banks increasingly grumbled that they could not replicate the test results, which contradicted any conceivable math.

This particular recommendation is reminiscent of a line of questioning from Powell’s Senate confirmation hearing. When asked if banks were still too big to fail, Powell simply replied, “I would answer no.”

Can you imagine any of his three predecessors shedding nuance for such plain-spokenness regarding such a sensitive subject?

With any luck, Powell’s first semi-annual appearance in front of Congress on Tuesday and Thursday will prove equally refreshing. Investors will be on tenterhooks waiting for the first politician to ask what the Fed’s role should be when stocks go bump in the trading day. Powell should simply reply, “I would answer none.” Let’s hope there won’t be a “Powell put.”

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

Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of "Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America," and founder of Money Strong LLC.

© Copyright 2021 Bloomberg L.P. All Rights Reserved.

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Expect him to tell it like it is in his first congressional testimony this week.
powell, fed, congressional, testimony
Tuesday, 27 February 2018 07:12 AM
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