December 2017 Fed Thoughts: Song of the Thin Man by Vincent Reinhart Chief Economist

The news that President Trump picked We were apparently not alone in being the probability chips currently in fed a thoroughly conventional candidate initially confused about the choice. funds futures are placed on fewer actions. to head the Federal Reserve next year Indeed, many market participants still Even though the macro forecasts of the was reassuring. Our initial reaction was seem confused, in that they assume that Fed and most market participants seem that Fed-chair-to-be Powell not only Powell will deliver dovish policies and aligned, market expectations track below looks the part of a central banker, but make no more than cosmetic changes FOMC guidance for the first year of Chair also showed financial acumen in “My in the Fed’s monetary policy process. Powell’s tenure in the same manner they Man Godfrey,” keen insight in “The Thin True, Powell did not come across as an did for all of Chair Yellen’s leadership. Man” and its sequels, and a real knack agent of change at his confirmation We think that the former is a mistaken for dealing with difficult colleagues in hearing. Rarely does anyone on that extrapolation of the split personality of “Mister Roberts.” Those are important side of the green felt table get past policymaking that produced the latter. qualities for someone guiding members anodyne on those occasions. The reality of a committee who are sometimes is that Powell is a pick to the right of the Policy Expectations For End-2018 difficult and always disputatious to a incumbent on monetary policy inclination 40% conclusion and then communicating and engineered difficult changes in a 35% the choice to a wider world. To our hidebound institution in his term at the 30% initial disappointment, though, someone US Treasury. 25% explained that the actor William Powell As for monetary policy, Chair Powell is died in 1980 and that the nominee is likely to follow through on the guidance 20% actually Jerome, “Jay”, Powell, a current the Federal Open Market Committee has 15% Fed governor and former Bush (senior) routinely been providing for 2018. With 10% Treasury official. The consolation is that resource slack probably exhausted and 5% the younger Powell showed the same aggregate demand expected to grow at attributes of the elder during his career, 0%

a pace faster than that aggregate supply, percent impliedby fund s fed futures, but it is disappointing that Myrna Loy will Six Five One Two

three-to-four quarter point firmings Four Three not be at the Fed’s Fourth-of-July party. currently seem appropriate, as in the Seven (Someone else subsequently relayed the Standish forecast. Those moves depend bad news about Ms. Loy’s death in 1993. Unchanged on the data, of course, and are not priced Number of one-quarter percentage It is a colder world all-around.) in futures. Indeed, about one-third of point hikes Source: Bloomberg, acccessed 12/5/2017. Say what? Jay Powell will act in 2018 of action? Is he too incrementalist to for three decades2. Jay Powell in a senior like Janet Yellen in 2017, but market affect meaningful change? position at the Treasury helped make that participants discount expectations The first observation is that he has already change possible. because of the way Janet Yellen acted told us there is room for improvement What sort of changes are on the table for from 2014 to 21016. This is not about in Fed communication. We were on the Fed? The FOMC is starting from a low Janet Yellen, who successfully managed the same program one year ago at the enough place in its communications that her committee and market expectations. Brookings Institution about “Fedspeak.”1 most ways look up. Fed officials have to She won, in that a policy maker more The governor was brave to appear in a reconcile their relationship with: dovish than most Fed colleagues got forum predisposed to criticism and he The Congress. This is a tough row to hoe, them to enshrine a lower-for-longer mostly was defensive. However, Powell path for the federal funds rate in two as legalistic interaction for twelve years admitted, “I have come around to the has made Hill staff hostile toward the Fed installments, showing her flexibility to view that focusing too much on the changed events. and Fed staff suspicious of the Hill. Given precise timing of policy moves may be the reception at his nomination hearing, Yellen 1.0 reigned from 2014 to adding to confusion and frustration about Jay Powell apparently walked the corridors 2016 and agreed in principle to the our communications.” Moreover, “In my of the Senate to assuage concerns. As need renormalize monetary policy. view, communications should do more to an additional easy fix to broken oversight Opportunistically, however, events emphasize the uncertainty that surrounds of the Fed, Chair Powell can invite the intruded on acting, whether there were all economic forecasts, should downplay Congress to authorize two (and only bad data prints, elevated market concerns, short-term tactical questions such as two) reviews by the Governmental or elections somewhere looming. She the timing of the next rate increase, and Accountability Office of Fed monetary was able to put off her more hawkish should focus the public’s attention instead policy to be delivered just before his colleagues (helped by being right on the considerations that go into making semiannual testimonies. The GAO can about resource slack and inflation policy across the range of plausible paths work out the prescriptions on policy from pressures) until the force of promise for the economy.” standard rules, consult with the usual ultimately weighed. To meet diminished The second observation is that Powell expert suspects, and produce a script for expectations, the FOMC slipped in worked at the Carlyle Group in between Hill staff to draw from in asking questions December actions in 2015 and 2016. stints in the government. An important at the hearings. Those hearings might The Fed head was able to do so because part of their value added is restructuring actually become more effective. everyone in the Boardroom, herself businesses. We presume that the first included, believed Janet Yellen was a two- Themselves. Fed officials created orphan two bullet points they read from on the meetings—the four times they gather term chair, and denying her due would be first day after acquisition is that this is costly. without press conferences and seem a well-performing entity and that any completely reluctant to act. They have Yellen 2.0 recognized that elections have enterprise can perform better. The also heaped responsibility on the chair consequences. In 2017, with less heft third point, unwritten, is that there is to explain their actions at those press in pushing back against the ingrained a takeover window in which change at conferences so they do not have to agree hawkish impulses of main FOMC the outset is easier to implement and in writing in their press statements. The participants, Yellen employed monetary- more understandable from the outside. alternative is to have press conferences policy jujitsu. The chair agreed to firming Sensing a need to change, he has the after every meeting, reduce the number of along extant guidance, but no more and private-sector experience to do so. meetings to reduce the burden, and share with considerable market forewarning, The argument recurs that the public the responsibility of presenting monetary and meanwhile put in place a glacial sector is different, and change can be policy views. Six meetings a year, each path of balance-sheet renormalization. harder, especially when vested interests with a press conference, fit nicely into In doing so, Yellen modelled good obstruct. In our experience, no force of the calendar and allow time to prepare behavior, as her wont, for her surely more stasis is more formidable than primary for the press. Every meeting is therefore conservative successor. dealers of US Treasury securities. After “live.” To emphasize the commonality of In the event, her more conservative infractions of bidding rules in 1992, the decision, the chair could co-present successor is Jay Powell, making the a modest proposal to move toward a with a colleague from the FOMC who transition easier as he was present at the more resilient auction technique was put otherwise does not get prime time. There creation of this policy. He will deliver forward (here). Recognize that Milton are twelve FOMC members, three of which Yellen 2.0 and slowly disabuse market Friedman, not a shrinking violet, had have vice-chair designations to get their participants that Yellen 1.0 remains in pushed for this reform, with no traction, days in the sun (vice chairs of the Board the building. The market will correct to a and of supervision at the Board and of policy path than is tighter than currently the FOMC—the president of the Federal expected but still lower for longer for Reserve Bank of New York). Let the longer than anytime else in Fed history. 1 “Understanding Fedspeak” event cosponsored by the Hutchins Center on Fiscal and Monetary Policy at the Two confusions reign about Jay Powell as Brookings Institution and the Center for Financial Eco- nomics at Johns Hopkins University, Washington, D.C. 2 Friedman, M. (1963). Price determination in the an agent of change. Does he see a need United States treasury bill market: A comment. The Review of Economics and Statistics, 318-320.

2 others rotate on the podium at the press they serve the public. Go back to three has denuded meaning from the incoming conference with the chair, the four Bank paragraphs and start from scratch every employment data. That is the world the presidents on the FOMC each year and time. If monetary policy really was Fed has made, and absent a horrendous two of governors (on a two-year cycle). data dependent and made meeting by breakdown of the political system, they Even better, follow the European Central meeting, its summary would change every raise the funds rate another quarter point Bank and hold one of those six meeting time. And, if members cannot agree to at the upcoming meeting. As opposed to a year at a Reserve Bank, reaffirming the put it into writing, they have not agreed. prior meetings, they might actually mark regional diversity inherent in the Federal To the extent that the press conference up their economic outlook and, dare we Reserve Act. September is a good time was made less chair-centric, the FOMC say it, raise some of the dots on interest of year to travel to one of the twelve might actually have to speak with its own rate expectations. districts, where monetary policy makers voice. could hear a special topic for committee Enough about unsolicited advice, there consideration and also remind Board is a December FOMC meeting, which staff that they are not the center of the everyone has reasonably assumed will universe. bring a quarter-point higher policy rate. The public. The FOMC statement is too The Fed told us, told us again, and the complicated, too filled with jargon, and data have thus far not thus far proved almost never changes. This is a document an obstacle. There is great irony that an written for the elite, who have forgotten institution preaching data-dependence

3 Standish Mellon Asset Management Company LLC Boston • Pittsburgh • San Francisco Standish Mellon Asset Management (UK) Limited London www.standish.com • [email protected]

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