One of the things you may have noticed about last month’s “most important” Fed meeting in recent memory is that the market has completely lost track of the narrative.
Indeed, keeping up with the various competing dynamics that constant central banker meddling has helped to create is nearly impossible and now that the FOMC has admitted that it’s at least partially (and probably wholly) market dependent, the reflexivity problem (or, the “removing of the fourth wall” to quote Deutsche Bank) clouds the picture so much that it’s no longer even clear that there is a correct interpretation.
Of course the FOMC doesn’t do itself any favors when Fed presidents (and most especially Janet Yellen) do so much speaking that you’d think they were on tour promoting a book. Between the convoluted, self-referential reaction function and the cacophony of speakers, the market just simply can’t process it all and with that, we bring you the following from RBS’ Alberto Gallo who asks if perhaps we have reached “peak Fed speak”.
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Over the past decades, central bankers have radically changed their approach to communication, as their policy became increasingly active. These have been the key milestones at the Fed:
- 1995: all changes in monetary policy would be announced immediately
- 1999: statement released after every meeting, specifying the fed funds “target”
- 2002: dissenting votes published immediately
- 2003: Forward guidance on policy (“policy accommodation maintained for a considerable period”)
- 2008: Time-contingent forward guidance (“for an extended period” changed to “at least through mid-2013”)
- 2012: Data-contingent forward guidance (“appropriate at least as long as the unemployment rate remains above 6 ½ percent…”)
- 2015: Market-contingent forward guidance? ("an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession”, September 24, 2015)
The Yellen era, so far, has been a mix of time and data-contingent forward guidance, where the Fed has been using both labour market and inflation targets as well as time as goalposts for its policy. But starting with the two taper tantrums and increasingly over the past months, the Fed’s communications have been shifting towards the market, including international developments.
This is, potentially, a sea change. Tying policy communication to market developments (or “international developments”) means tying yourself to market volatility, which intrinsically makes it trickier to implement a stable policy path. The worst-case scenario is a situation like the PBoC, where central banks explicitly decide to target asset prices, and fail. Today, investors are questioning the value of forward guidance and the central bankers’ credibility to commit to their pledges. Have central bankers moved from saying too little to saying too much?
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We'll leave it to readers to answer the last question posed above.