There was a time when US central bankers were known for keeping their mouths shut. As he brought inflation under control in the 1980s, Paul Volcker, then Federal Reserve chair, assumed a public pose so inscrutable that the journalist William Greider titled his bestselling account of the central bank’s role during that period Secrets of the Temple.
Volcker was “the strong, silent type”, Greider wrote, known for his “daunting” intellectual self-confidence and “intimidating” manner when facing antagonistic congressional committees. “Wreathed in cigar smoke, Volcker would shake his head wearily and dismiss every accusation as simplistic. The hostile questions were deflected with rambling, evasive answers that conceded nothing. ”
The smoke-filled rooms are long gone in Washington and so is that old Fed communications strategy. As US central bankers confront the most serious inflationary surge since Volcker’s time, they have become relentlessly chatty, appearing on stage and screen to discuss the latest economic data and the implications for the Federal Open Market Committee’s policymaking.
The result is the Wall Street equivalent of Keeping Up with the Kardashians – must-see reality TV. To navigate the markets, investors need to keep up with the talking heads at the Fed. Still, some clearly hanker for the days when there was more to their jobs than parsing the pronouncements of chair Jay Powell and his far-flung cast of central bank characters.
“The Fed has radically swung the pendulum from opaqueness in the old days to over-transparency today,” said David Rosenberg, a former Merrill Lynch economist who now heads his own eponymous research firm. “They are showing up on Bloomberg TV, CNBC, Fox Business news. All they do is talk about policy. ”
As is the case with the Kardashians, there are a lot of central bankers in the US – do not forget, there are 12 regional Feds in addition to the bigwigs in Washington. But market participants see so many of these folks so often they feel as if they know them. As soon as they finish speaking, tongues wag across Wall Street about the implications for interest rates rising.
A case in point came a few days ago after a speech by the “dovish” Lael Brainard, who sits on the Fed’s board of governors and is awaiting Senate confirmation to be vice-chair. Her comments were seen as a sign she was moving in the direction of such “hawkish” FOMC members as James Bullard, the outspoken St Louis Fed president. Investors pushed bond yields higher, reckoning that the public wordplay pointed to a shift in the internal debate at the FOMC.
“It gives you a better idea of where the contour of the committee is,” said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income. Fed watchers obsess over each speaker’s narrative, trying to figure out not just the middle-ground view of the committee but – more importantly, this cycle – who’s the leader, who’s ahead of the curve, who’s pulling the committee, how fast and how father? ”
The current Fed approach to communicating with market participants is its way of dealing with what could be called the 1994 problem. In February of that year, the US central bank caught investors around the world off guard when it raised rates for the first time in five years – by 0.25 percentage points to 3.25 per cent.
US bond prices fell and the S&P 500 index dropped 9 per cent over the next month. Amid the ensuing turmoil, California’s Orange County, which had used public money to make complex bets that interest rates would remain low, filed for bankruptcy.
In the years that have followed, the US central bank has taken pains to avoid surprising the markets, which makes sense. Dislocations of the 1994 kind obviously complicate the Fed’s mission to promote price stability and maximum sustainable employment.
Ian Lyngen, head of US rates strategy at BMO Capital Markets, said he believes the Fed’s growing transparency is “one of the reasons that outright yields are as low as they are”. By regularly telling investors what they think, Fed officials reduce the uncertainty about how they will react to future changes in the economy, he said.
Rosenberg counters that the Fed’s sensitivity to the feelings of investors points to a “sad state of affairs”, reflecting the outsized importance of asset prices to the health of the economy. The Fed officials appearing on the financial networks “aren’t talking to Main Street”, he said. “They are speaking to portfolio managers.”
All that talking has opportunity costs, too, as the economists say. Rosenberg said he was regularly bombarded with requests from clients to explain the latest statement by a Fed official. He says he complies, but worries that he has been diverted from more useful work – missing something else of importance. The same could be said for the rest of us.