Federal Reserve Chair nominee Jerome Powell has likened central bank communication to a popular Far Side cartoon: A man chides his dog Ginger about rooting through the trash, but all the dog hears is “Blah, blah, Ginger, blah, blah blah.”
In the Fed’s case, investors focus on what policy makers say will happen with interest rates at their next meeting, and not on much else, he told a conference last November.
While Powell is widely seen as hewing to the Fed’s current strategy of gradually raising interest rates if he is confirmed by the Senate to take over the central bank’s top spot in February, he could push for changes in how it gets its message across, especially in the so-called dot plot that sets out officials’ projections of where policy is headed.
“I’m sure that we can improve our communications and will strive to do so,” the Fed governor said at the Brookings Institution in Washington on Nov. 30, 2016.
Central-bank communications was the topic of a panel discussion Tuesday in Frankfurt with current Fed Chair Janet Yellen, European Central Bank President Mario Draghi, Bank of Japan Governor Haruhiko Kuroda and Mark Carney, who heads the Bank of England. Yellen said disseminating a clear public message was a challenge owing to a broad spectrum of views coming from the Fed’s 19-member policy committee.
“From a communication standpoint it is challenging because individual members of the committee are able and give lots of speeches,” Yellen said.
How well the Fed conveys its intentions can have a direct bearing on how effective its policy is. If the Fed surprises financial markets, investors may respond in ways that hurt the economy. Case in point: the 2013 taper tantrum, when long-term bond yields shot up after then-Chairman Ben Bernanke unexpectedly suggested scaling back the Fed’s bond purchases.
Powell has publicly acknowledged that there are “shortcomings” in one of the Federal Open Market Committee’s main communication tools -- the interest-rate dot plot that is released four times a year.
Because the projections are anonymous and aren’t tied to individual economic forecasts, “there is no easy path to the identification of a committee reaction function” -- how policy makers will respond to movements in the economy -- he told a monetary forum in New York in February 2016.
The quarterly chart also doesn’t distinguish between voting and non-voting members of the FOMC and at times can look outdated due to changes in the economic outlook in the interim, he said.
One big way that Powell could improve it would be to work on coming up with a consensus FOMC forecast for the economy and policy, along with indications of how the committee would react if its economic expectations turned out to be wrong.
The Fed tried this five years ago, Yellen said in Frankfurt, but without success.
“We have a very large committee and attempting to craft a consensus view of the outlook including a path of policy proved to be extremely challenging,” she said. The process was further complicated because it was conducted against the backdrop of Fed asset purchases, so officials had to come together on both the rate path and the outlook for bond buying. “That was perhaps reaching too far, to think 19 people could agree on that,” she said.
Andrew Levin, who was at the Fed back then and was involved with the effort, voiced optimism that a consensus forecast can be reached.
“This idea that a committee of 12 people can’t agree with the help of a good chair and a vice chair is ridiculous,” said Levin, who is now a professor at Dartmouth College, adding, “If people dissent, so be it.”
When at full strength, the FOMC’s 12 voting members comprise the seven Fed board governors in Washington, the president of the New York Fed and a rotating panel of the remaining 11 regional bank presidents.
If Powell is able to push through changes in the dot plot, it likely would be welcomed by some of his fellow Republicans on Capitol Hill, who have criticized the central bank for a lack of transparency.
Representative Andy Barr, who heads the House Financial Services Subcommittee overseeing the Fed, introduced a bill last week that would require the voting members of the FOMC to adopt a “consensus expectation for the conduct of monetary policy” each year.
At a Nov. 7 hearing on the bill, the Kentucky Republican said it reflected “the very generous advice” of Yellen. Barr has also spoken about potential Fed reforms with Powell, including during an hour-long breakfast the two men had on June 8, the Fed governor’s calendar shows.
The introduction of Barr’s proposal last week could aid any Powell efforts to cajole his colleagues into coming to a consensus on a forecast by allowing him to point to congressional pressure to come up with a common monetary policy strategy.
Another plus: Unlike other House bills dealing with the Fed, Barr’s does not subject the central bank’s monetary policy decisions to review by the congressional Government Accountability Office -- a provision Yellen opposed as an attack on the institution’s independence.
It’s not only the dot plot where Powell sees room for improvement in how the Fed communicates with the public.
Responding to the Ginger the dog syndrome, he’s tried to avoid speaking too precisely about the timing of interest rate moves -- a posture yet to be adopted by many other Fed officials.
He’s also cautioned his fellow central bankers against over-reacting to individual pieces of economic data because that can give the impression that policy is being made on an ad-hoc basis. And he’s called for more stress in their speeches on the uncertainty surrounding all economic outlooks, including their own.
That said, he’s shown no inclination to try to stop them from speaking up -- in spite of investor criticism about potential confusion arising from the resultant cacophony. Powell has even praised the presidents of the Fed’s regional banks for doing a better job of explaining the central bank’s position to the public than the governors of its board in Washington do.
“There’s real value in it, so I wouldn’t try to do away with that,” Powell said at Brookings.
© Copyright 2022 Bloomberg News. All rights reserved.