Fed officials disagree on communication strategy amid policy uncertainty

Original author: Bao Yilong

Source: Wall Street Journal

FOMC members are divided over communication strategy, with Waugh's "say less" approach facing resistance from colleagues.

On October 27, Nick Timiraos of "The New Fed Whisperer" wrote that Fed Chair Walsh has championed a new communication style of "silence as virtue," but failed to convince most colleagues to follow suit, resulting in a noisy and fragmented message from the committee and causing market expectations for an October rate hike to plummet from 70% to 15% within a single month.

According to article statistics, between the conclusion of the last policy meeting and the start of this week’s quiet period, the 16 Fed officials whose terms expired a year ago collectively delivered at least 59 speeches, interviews, and public statements, roughly comparable to the approximately 54 such appearances during the same period a year ago.

This figure indicates that although Wash deliberately limited his own remarks after assuming the chairmanship in May, other officials have stepped in to fill the void, each offering their own perspectives.

The direct consequences of the above divergence have been clearly reflected in the market. After the Federal Reserve raised rates last month, the market inferred a higher likelihood of consecutive rate hikes from Waugh’s press conference remarks; subsequently, two vice chairs signaled they were not in a hurry to act immediately, causing the probability of an October rate hike to drop sharply.

Kathy Bostjancic, Chief Economist at National Mutual Insurance, said:

If Wash doesn't speak up, others will fill the void.

The essence of this debate is not whether to restore承诺式前瞻指引—almost no officials wish to return to the approach before 2021, when overly explicit interest rate commitments were seen as delaying the Fed’s response to inflation.

The article highlights the core disagreement: whether officials should still explain to the public how they will respond to economic changes?

Wash’s position is clear. He believes that continuously articulating policy outlooks locks officials into their own forecasts while obscuring the signals that markets can convey to the Federal Reserve. He stated this month in Bangkok:

I’m not going to say now what I might do at the remaining meetings this year; this is a new chapter for the Fed, and we no longer do things like that.

Richmond Fed President Tom Barkin, who supports this position, told reporters that he is "very pleased to see this seemingly becoming an institutional norm." Barkin routinely discusses economic conditions but almost never comments on specific meetings.

However, several officials have publicly defended the need for more thorough communication.

Cleveland Fed President Beth Hammack stated in a speech this month that the cost could be very high if households or businesses borrow based on a misjudgment of policy direction.

She emphasized during the interview that clarifying her framework does not equate to making a commitment:

What they heard was not a promise, because I did not make a promise—I was explaining a framework.

St. Louis Fed President Alberto Musalem directly refuted the logic that "saying less allows markets to focus on data," stating that a central bank that remains silent about its own framework "does not enable markets to focus on data—speculation only creates noise."

He added:

The choice before central banks is not between noisy overpromises and silence, but between leaving the public to guess and proactively informing them.

Hammack and Musalem both assumed their current positions in 2024 and have come from financial industry backgrounds; they have also consistently been among the most prominent voices advocating for further rate hikes this year.

This communication experiment quickly faced a stress test following last month's rate hike.

Nick Timiraos noted that the market inferred a higher probability of consecutive rate hikes in October from Waugh’s remarks and economic data, but subsequent statements by vice chairs corrected this impression, suggesting no urgency to act again, causing market expectations to reverse.

Federal Reserve Governor Christopher Waller described this episode as highlighting the limitations of significantly compressing forward guidance, calling it equivalent to "throwing out the baby with the bathwater," and bluntly stated:

I can't think of anything that more closely resembles forward guidance than what happened that week.

Former Federal Reserve Vice Chairman Donald Kohn said that in the past, before sending such a strong signal to the market, he would share the content of his speech with then-Chairman Greenspan or Bernanke for their input.

He said the two never expressed any objection. Kohn said:

Current developments indicate that at least some committee members are uneasy about such limited forward guidance, as the market is moving ahead of the direction the committee hopes to guide.

Complicating the situation further, current officials not only disagree on their assessment of the economic situation but also lack a unified narrative on the policy path.

The article notes that some officials believe monetary policy is clearly accommodative; others view this round of rate hikes more as a precautionary response to the risk of entrenched price expectations from years of high inflation.

UBS Chief U.S. Economist Jonathan Pingle said that under normal circumstances, the chair’s statements provide a common language that other officials can reference, and that “having the chair speak on behalf of the committee brings a certain coherence, which I believe is currently lacking.”

Former Federal Reserve economist Claudia Sahm has characterized the current situation as "the worst of all possible outcomes." She said:

No one could force him to speak for the committee, and frankly, he couldn't force other committee members to stay quiet.

Currently, a working group of external experts is drafting recommendations on the Federal Reserve’s communication approach, with an expected submission by the end of the year. Walsh stated that any adjustments must be decided by the full committee.