Fed: Confusion in Messaging Continues

Conflicting Signals From FOMC Members

Federal Reserve Chairman Jerome Powell put risk assets into overdrive with his press conference December 13 strongly hinting that the next move by the Federal Open Market Committee would be to lower interest rates. Since then, a long line of Fed officials have made public statements alternating between agreeing with, and contradicting, the Chairman. Both the Treasury and equity markets have decided for now that it is Powell’s view that matters. But if the ongoing rally is interrupted by a major economic or geopolitical event, the discordant views will only add to volatility in uncertain markets.

The first official attempting to restrain enthusiasm after the Powell press conference was John Williams, President of the New York Fed, often considered to be the second most important Fed voter, as well as someone closely aligned with the Chairman’s views. This time, however, Williams had a different public view from Powell. The Fed was not thinking of rate cuts now, Williams said, and expectation of a rate cut in March was premature. Presidents of the Chicago and Cleveland Feds chimed in to counsel investor restraint as well. Most emphatic in expressing caution was Raphael Bostic, President of the Atlanta Fed who suggested on Tuesday that there was no “urgency” to cut rates, stressing that inflation “is going to come down relatively slowly in the next six months.”

Expressing a very different view from her colleagues was Mary Daly, President of the San Francisco Fed, who believes that rate cuts may be necessary in 2024 to prevent over-tightening as inflation continued to come down. “We’re acknowledging progress when progress is there,” she told Wall Street Journal’s Nick Timiraos on Monday.

What is especially noteworthy about these conflicting public messages is that all 12 voting FOMC members agreed to pause rate hikes earlier this month after two days of deliberations. Most officials — including some who are now suggesting that the central bank not lower rates too fast — voted to cut rates at least three times in 2024. Now, finding that their decision, and the dovish message from Powell, had propelled valuations upward and reduced the Fed’s grip on markets, they are running in the opposite direction.

Rushing like lemmings to follow the Chairman in the FOMC decision-making process, and contradicting each other in subsequent days and weeks, is no way to run policy. Since intelligent individuals can differ in their views on the outlook, Fed officials appear to give vent to their differences by expressing their policy conflicts in public since it is deemed unseemly to differ with him in Committee. Such behavior adds to overall market volatility.

It was not always this way. Some of us remember that a majority of Fed voters decided to go against Chairman Paul Volcker in February 1986 when he wanted to keep the discount rate elevated. Volcker was able to delay the proposed cut to the following month when he could do it in coordination with the West German Bundesbank. Transparency won, Federal Reserve reputation enhanced!

Is concern about the current state misplaced given the Christmas gift the Fed got yesterday in the 0.1% decline in the headline index in November compared with the previous month? It is undoubtedly good news. It is also important to keep in mind that mitigation in month-on-month inflation since mid-2022 has been followed by reacceleration as price increases spread to different sectors. It is also worth recalling that the core inflation rate (that excludes food and energy) is still running at 3.2% over the past year, ahead of the Fed target.

Whether or not the battle against inflation has been won, the Fed could yet lose the war if it does not improve the quality of its messaging.

[SriKonomics will not be published next Saturday, December 30. Happy Holidays and the Best in the New Year to all readers! The next issue will be out January 6, 2024.]

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

December 23, 2023

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities.  Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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