Allianz chief economist Elian complained about excessive communication between the current Fed leadership team and believed that this may have exacerbated excessive market volatility.
Allianz Group's chief economic adviser and economist Mohamed El-Erian (Mohamed El-Erian) recently wrote that excessive communication by the Federal Reserve will increase the risk of economic and financial accidents.
Not long ago, the Federal Reserve did not say anything about its policies for a while, and policymakers tried their best to confuse people rather than clarify the facts. But those days are gone. Today, the market is full of “Fed remarks.” Last week alone, 11 officials delivered 20 speeches. No wonder people are increasingly concerned that excessive communication poses risks to the proper functioning of financial markets, the effective allocation of economic resources, and the stability of the global system.
In 1987, while attending a congressional committee, then-Federal Reserve Chairman Greenspan famously said, “If you think I'm speaking too clearly, then you must have misunderstood me.” In his 2016 book “The Only Game in the Town” (the only game in the town) about the central bank, Erian explained in detail that this was part of what Greenspan called “language used to confuse auditions.” In the words of economist Alan Binding (Alan Binding), it is seen as a kind of “grandiose English jargon,” which uses “a lot of complicated words but doesn't convey any meaning.”
The Greenspan era is long over. In 2011, then-Chairman Bernanke began holding regular press conferences after Federal Open Market Committee (FOMC) meetings. Later, this became a routine part of every policy meeting, supported by quarterly FOMC members' personal forecast updates, meeting minutes, a significant increase in other communications, and an expansion of the target audience. Powell, the current chairman of the Federal Reserve, attended the “60 Minutes” interview event and was personally interviewed in a highly distributed journal.
The argument supporting this full communication is that transparency is essential for effective forward-looking guidance, which helps the economy and markets transition more smoothly when policies change. This kind of communication is also seen as central to the Fed's expansion of influence. In fact, as the Financial Times said in a 2014 editorial, “Monetary policy guides the economy by influencing sentiment, and its role is no less important than any financial channel such as interest rates.”
However, despite numerous speeches from members of the Federal Reserve Board of Governors and regional federal reserve presidents, they have not achieved their goals recently. Instead of promoting orderly economic and financial transformation as before, excessive communication today has exacerbated excessive market volatility.
More and more people are calling on Fed officials to exercise restraint, fearing that too much communication will increase the risk of market and economic accidents. Some people think it would be beneficial to completely eliminate bitmaps. Others wanted to reduce the frequency of press conferences and encourage fewer speeches.
According to Erian, the problem is not only the Fed's communication volume, but also itself.
Lacking a strategic backbone and an operational monetary policy framework, the Federal Reserve has become overreliant on data, and officials are often forced to immediately comment on inherently unstable data releases, overextrapolating the information they obtain.
There have also been many situations where positions have turned 180 degrees. Earlier this month, Powell suddenly downplayed his recently expressed optimism that the US is experiencing favorable supply-side development, thereby increasing potential output and fighting inflation, which has had a considerable impact on the market. Meanwhile, in a speech on November 9, Powell said that this improvement may have worked, adding that strong economic growth may justify further policy tightening.
With all of this in mind, it's not surprising that a study entitled “The impact of the Fed's press conference on the market” published by the Center for Economic Policy Research (Center for Economic Policy Research) came to two noteworthy conclusions.
First, “Markets were more volatile during the FOMC meeting... especially after Powell's press conference.” Second, since the outbreak of the pandemic, “the stock and bond markets have tended to move in the opposite direction of their initial reaction to FOMC policy statements during press conferences. This shift is systematically linked to the wording Powell used in his speech.”
Erian said that judging from his monitoring of recent trends in US bond yields, these two conclusions have been further confirmed, reinforcing the view that the Fed's communication has changed from providing signals to amplifying noise. No wonder forecasters and traders don't hesitate to ignore guidance, including policy interest rates set entirely by the Federal Reserve. They are now expecting a sharp cut in interest rates in 2024.
Erian called for the quantity and quality of the Fed's communication to be re-examined. This not only means they want to “talk less, smile more,” as Aaron Burr suggested to Alexander Hamilton in the musical “Hamilton,” but it also means paying more attention to the potential impact of speech on the market, strategically solidifying their views, and paying attention to the consistency of their messages, especially when it comes to signals from noisy data releases, which are easily rejected by subsequent data.
Finally, there is a need to improve communication mechanisms, which are critical to monetary policy accountability, including the fact that Congress questions the Federal Reserve Chairman every six months, which is beyond the purview of the Federal Reserve.
Elian believes that if progress is not made in these areas, the influence of the Fed's policies will weaken, and in the long run, the Fed will weaken its political autonomy, which is critical to its effectiveness.