How the Fed’s quest for transparency made markets more volatile

As
anticipation
for
signals
around
rate
cuts
intensifies,
so
has
the
debate
around
how
the
Federal
Reserve
communicates
with
the
public.  

Economists
remain
divided
on
how
many
rate
cuts
to
expect
from
the
Fed
in
2024,
despite
what
Wall
Street
saw
as
dovish
signals
from
Fed
Chair
Jerome
Powell
in
his
latest
press
conference
and
the
Federal
Open
Market
Committee’s
most
recent
statement.

Markets
typically
respond
to
Fed
comments
with
price
swings
in
either
direction,
and
recent
research
shows
they
are
particularly
reactive
to
Powell.

A
study
from
the
Center
for
Economic
Policy
Research
found
that
market
volatility
during
the
central
bank
chief’s
press
conferences
was
three
times
greater
than
during
those
of
his
predecessors.
Researchers
noted
this
can
be
traced
to
the
fact
that
Powell’s
messaging
tends
to
depart
from
the
FOMC
statement
released
after
the
meeting.  

“It’s
urgent
[the
Fed]
start
talking
in
terms
of
scenarios
and
risks
and
contingency
plans,
because
we’re
in
a
world
that’s
very
uncertain,”
said
Andrew
Levin,
a
professor
of
economics
at
Dartmouth
College. “When
the
Federal
Reserve
makes
a
series
of
U-turns
—
not
just
one
but
a
series
of
them,
which
is
what’s
happened
over
the
last
several
years
—
that
undermines
public
confidence.” 

Levin,
who
was
a
special
communications
and
monetary
policy
adviser
to
former
Fed
Chair
Ben
Bernanke,
says
dissenting
views
among
policymakers
are
increasingly
rare,
and
instead
of
presenting
a
variety
of
outcomes
and
risks,
the
Fed
emphasizes
baseline
cases.
And
given
the
Fed’s “data-dependent”
approach,
the
baseline
can
change
rapidly
as
new
economic
reports
are
released.  

“Unfortunately,
what’s
happened
in
recent
years
is
that
I
think
there’s
been
increasing
peer
pressure
within
the
Fed,
the
culture
has
changed,
to
really
discourage
dissent,”
Levin
said. “So
now
we’re
stuck
with
a
system
where
there’s
only
one
view,
there’s
only
one
outlook,
it’s
a
baseline
outlook.
And
there’s
really
no
way
to
understand
the
Fed’s
thinking
about
where
are
the
risks.” 

At
his
most
recent
news
conference,
Powell
was
asked
why
there
are
rarely
dissenting
views
in
the
policy
statement,
even
when
more
spirited
debates
are
revealed
later
in
FOMC
minutes.
Powell
responded
by
saying
the
Fed
is
a “diverse
group”
and
that “we
have
dissents
and
a
thoughtful
dissent
is
a
good
thing.”  

Watch
the
video
above
to
learn
more
about
how
the
Fed’s
busy
speaking
schedule
can
create
market
volatility
and
how
it
balances
transparency
with
market
impact.