The View | Market analysis in one question: has the Fed lost the plot on inflation?
- Investors remain assured that central banks will issue more debt if things turn sticky, but they will take flight the moment they sense the Fed has lost control of inflation and will have to raise interest rates
It was former Federal Reserve Board chairman Alan Greenspan who perfected “Fedspeak”, what economist Alan Blinder called a “turgid dialect of English”. Greenspan used to keep markets second-guessing to prevent overreaction to Fed moves, saying once, “If I’ve made myself clear, you must have misunderstood me”.
A favoured response to questions was “yes and no”. For a man who himself relied on deep analysis and economic optimisation, he was sensitive to investor behaviour. Not so his successors, who have adopted the policy of clear and extensive communication. The idea was to let the markets know what was happening so they could react proportionately.
It’s a reminder of the comment attributed to the first chancellor of Germany, Otto von Bismarck, who said that those who wish to maintain respect for sausages and laws should not see how either is made. To that list should be added Fed policy.
As things stand, when current chairman Jerome Powell puts his game face on and announces policy, we can see his fellow board members fighting like alley cats behind his back.
The Fed provides a “dot plot” that graphs the different views of members as to when they think rates might rise and by how much. Markets want good decisions and not to sweat at every twist and turn of how they are made.
Until recently, Powell’s clear and extensive communication has repeated the mantra of keeping rates where they are. The Fed has now been forced to come out to say that rates are likely to have to go up sooner than expected.