On October 17, Financial Association News reported that in recent years, Fed Chairman Powell often mentioned "relying on data" and "making decisions at successive meetings". However, this seemingly cautious bureaucratic style is now being criticized by economists.

The employment data of the past three months especially illustrates the unusual nature of this: the employment data in July and August was clearly weak, so under Powell's leadership, the Fed initiated this round of rate cuts with an oversized 50 basis point cut. However, the employment growth rebounded in September, the previous weakness seemed to disappear. Traders withdrew their bets on further significant rate cuts, and some economists began to criticize the Fed for being too panicked and acting too quickly.

This is the problem that is trapping Powell, economists, and global markets: everyone's focus is firmly locked in the 6-week Fed decision-making cycle, continuing to rotate.

Staring at the data is causing fluctuations.

For central banks, focusing on the data itself is absolutely correct. In times of short-term economic uncertainty, policymakers will make decisions based on this data. However, the problem lies in Powell's continuous "hands-off" approach, which is making more and more investors and economists dissatisfied. They believe that the Fed chairman should show more confidence in the economic outlook for the next year or so, helping the public better understand the direction of monetary policy.

Drew Matus, a strategist at MetLife Investment Management, criticized that the Fed's reliance on data is causing more volatility. The quality of economic data has deteriorated, and most data looks backward. In addition, data revisions may overturn previous assumptions about economic health and direction. So, the Fed's current approach is not really a good way to advance policy.

Contrary to the current focus on "6 weeks later", research over the past few decades has shown that the role of monetary policy is not only reflected in setting interest rates but also in the expectations of market participants and the public regarding the possible direction of interest rates in the next year. Official statements are crucial for this kind of forecasting.

Dartmouth College professor and former Federal Reserve economist Andrew Levin said that every monetary economist knows that monetary policy operates through the entire term structure, not just the current federal fund rate setting. Central banks need to clearly explain how they would adjust the policy rate path if their baseline forecast proves to be incorrect.

Limitations of Powell?

Part of this issue stems from the fact that the Federal Reserve does not have a so-called consensus economic expectation, but releases 19 independent forecasts every quarter. At the same time, the Fed Chair's attitude towards this forecast can vary - actively adopting it when necessary, yet keeping a distance at times.

In fact, the Fed Chair has enough information about the outlook of the Federal Open Market Committee. He speaks with all FOMC members before each meeting. Moreover, officials' statements during the meetings are usually very detailed and forward-looking. The issue is that these detailed records are not made public until 5 years later.

So how the expectations of monetary policy makers are communicated to the public entirely depends on Powell's personal choice. At last month's press conference, he made many comments on the current economic situation but did not focus much on the medium-term outlook.

Gregory Daco, Chief Economist at Ernst & Young, interpreted that Powell's style is more about 'openness to choices' rather than skepticism towards expectations, which is somewhat unusual. Daco stated that Powell is very candid about how the economy is evolving, yet a forward-looking perspective would be beneficial.

Claudia Sam, the founder of the 'Sam Rule', which recently gained popularity, also stated that a solid and structured narrative of economic development is helpful for policymakers to discuss future risks. In this case, a slightly more compact story structure is beneficial, as if the basic context is not well developed, the related risks will not be thoroughly analyzed.

Editor/Lambor