Watch your mouth ! The Federal Reserve's head man cops some flak ......


ref :- "Powell Policy Lost in Translation as Fed Blamed for Market Woes" , Bloomberg Markets

You've got to have some sympathy for the (relatively) new Fed Chairman Jerome Powell . Well, we've got some sympathy for him at any rate ..... but that's because we belong to that group who don't believe that Mr Powell has said anything untoward during his tenure so far.

But others were plainly upset by Mr Powell's comments on Oct 3rd when he said that monetary policy was still accommodative and probably a long way from neutral -- the point at which interest rates neither spur nor curb growth in the economy -- but might eventually have to turn restrictive. "Yeah .... so ?" we might have uttered, believing that Mr Powell was offering nothing particularly new or controversial and merely stating what we already knew. After all, doesn't the Fed's own "dot-plot" that maps out individual members' projections of the course of rates point to another hike next month and three more next year ?

That probably makes us as naive as Mr Powell is accused of being. Many investors took his words as emphasising just how far the Fed still had to go in raising rates, a communications error that according to some was the result of Mr Powell's inexperience and which was largely responsible for October's equity market sell-off . Of course such a view conveniently ignores other possible factors such as the escalation of the US / China trade dispute, its effect on the global economy and the already stratospheric valuations (overbought ?) of the market, but still .....

Now, one could argue that those investors are giving an overly hawkish interpretation to Mr Powell's comments that is not actually evident in the words used. But that would be to miss the point ..... in the modern world (as everyone keeps reminding us) perceptions right or wrong are everything, and few people have to be more careful with their words than the chairman of the world's most powerful central bank. We often comment on how investors will be poring over every word of every statement, trying to glean some nuance even if it's not there. Mr Powell stands accused of being .... well, a bit clumsy. That's the kind of thing that moves markets, and his detractors would say that Mr Powell is at least partly responsible for global equity markets losing trillions of dollars in value in October.

It's ironic, really ..... communication skills have been regarded as one of Mr Powell's assets. He has a markets background, in contrast to his two most recent predecessors (Yellen, Bernanke) who had PH.D.s in economics, and has a reputation for being able to translate difficult subjects into plain English. Perhaps it's only dry and crusty technical language that's not in danger of being misinterpreted.

As we say, we have some sympathy for the man. It could be people are inferring changes of policy from what Mr Powell says when actually the only thing that's changed is the manner of the Chairman's delivery. He has also taken charge at a time when the Fed will have to judge when to apply the brakes. Things were simpler in some ways for Janet Yellen and Ben Bernanke .... nursing the economy back to health after the financial crisis necessitated unavoidably accommodative monetary policy even if the extent of it had to be managed. Mr Powell, by contrast, faces on-target inflation, unemployment at a 48-year low and strong economic growth. By historical standards rates are still accommodative but fast moving towards that "neutral" rate of interest, the level which neither boosts nor slows GDP growth and beyond which policy becomes restrictive. For all the historic measures in the past taken to nurture economic recovery, in many ways running Fed policy now does seem more complicated.

It's become something of an issue for Mr Powell -- not just because some believe he has (inadvertently or otherwise) signalled that the neutral rate may be moving higher. The truth is that Mr Powell has often brought attention to the uncertainty surrounding predictions for the neutral rate (he's similarly wary about economists' estimates of the sustainable long-term unemployment rate, by the way). So when he says for example that rates are a long way from neutral, but he's also known for being sceptical about neutral rate projections, it's perhaps not surprising that investors might be a bit confused about what exactly he means. In the case of his comments on October 3rd, some plainly drew enough of a hawkish conclusion that it became pretty damaging to stock markets.

One's got to wonder about the future of the Fed's policy of "forward guidance". When the economy was in intensive care post-financial crisis, and investors needed their hands held, such a policy was eminently sensible. So too in the years afterwards as things headed back to full health. But with growth surging and rates approaching the inflexion point of neutral, the question is whether forward guidance will remain appropriate. To materially reduce the level of forwarding guidance one would presumably have to scrap tools like the dot-plot. The trouble is that many investors have become reliant on the Fed's guidance, and to withdraw it would hugely up the levels of volatility.

Some would answer that the stage we're at in the cycle means that guidance cannot be expected to be as accurate as it was in the past. And besides, if it's becoming as open to misinterpretation as it seems, a rise in volatility may be a price worth paying. Of course, best of all would be a situation where the Fed Chairman could talk in plain English without having people second-guess his words for hidden meanings ..... but realistically, that ain't gonna happen.

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