Opinion: How the Federal Reserve Became a ‘Reality Show’

There was a time when America’s central bankers were known for keeping their mouths shut. In controlling inflation in the 1980s, Paul Volcker, then chairman of the Federal Reserve, struck a public pose so inscrutable that journalist William Greider titled his bestselling account of the central bank’s role in this period “Secrets of the Temple.”

Volcker was “the strong, silent type,” wrote Greider, known for his “creepy” intellectual self-confidence and “intimidating” manner when facing antagonistic Congressional committees. “Swathed in cigar smoke, Volcker shook his head wearily and dismissed all accusations as simplistic. Hostile questions were deflected with rambling, evasive answers that admitted nothing.”

Smoke-filled rooms are long gone in Washington, as is that old Fed communication strategy. As U.S. central bankers grapple with the most serious rise in inflation since Volcker’s days, they have become tirelessly talkative, appearing on stage and screen to discuss the latest economic data and the implications for the Federal Open Market Committee. (FOMC for its acronym in English).

The result is Wall Street’s equivalent of “Keeping Up with the Kardashians,” a must-see reality TV show. To navigate the markets, investors need to keep up with the Fed’s talking heads.

Still, some clearly long for a time when their jobs were about more than analyzing President Jay Powell’s pronouncements and his scattered cast of central bank characters.

“The Fed has radically swung the pendulum from the opacity of the old days to the excess of transparency today,” said David Rosenberg, a former Merrill Lynch economist who now runs a research firm that bears his name. “They’re appearing on Bloomberg TV, CNBC, Fox Business News. All they do is talk politics.”

As with the Kardashians, there are plenty of central bankers in the US – don’t forget there are 12 regional Feds in addition to the bigwigs in Washington. But market participants see so many of these people so often that they feel as if they know them. As soon as they’re done speaking, tongues are churning on Wall Street about the implications for rising interest rates.

A case in this regard occurred a few days ago, after a speech by the “dove” Lael Brainard, who is on the Fed’s board of governors and is awaiting confirmation from the Senate to be vice president. Her comments were seen as a sign that she was moving in the direction of “hawk” FOMC members like James Bullard, the outgoing chairman of the St. Louis. Investors boosted bond yields, believing the public wordplay indicated a shift in the internal debate at Fomc.

“This gives you a better idea of ​​where the board’s outline is,” said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income. “Fed watchers obsess over each speaker’s narrative, trying to figure out not just the committee’s middle view, but — more importantly, in this cycle — who’s the leader, who’s ahead of the curve, who’s pulling the committee, how quickly and at what distance.”

The Fed’s current approach to communicating with market participants is its way of dealing with what could be called the 1994 problem. In February of that year, the US central bank caught investors around the world off guard by raising rates. for the first time in five years – by 0.25 percentage point to 3.25%.

US bond prices tumbled and the S&P 500 index dropped 9% the following month. Amid the turmoil that followed, Orange County, California, which had used public money to make complex bets that interest rates would remain low, filed for bankruptcy.

In the years that followed, the US central bank strove to avoid surprising markets, which makes sense. 1994-type shifts obviously complicate the Fed’s mission to promote price stability and maximum sustainable employment.

Ian Lyngen, head of US rate strategy at BMO Capital Markets, said he believes the Fed’s increasing transparency is “one of the reasons total yields are so low.” By regularly telling investors what they think, Fed officials reduce uncertainty about how they will react to future changes in the economy, he explained.

Rosenberg counters that the Fed’s sensitivity to investor sentiment points to a “sad state of affairs”, reflecting the enormous importance of asset prices to the health of the economy. Fed officials who appear on financial networks “are not talking to Main Street,” he said. “They’re talking to portfolio managers.”

All this talk also has opportunity costs, as economists say. Rosenberg said he was routinely bombarded by requests from customers to explain a Fed official’s latest statement. He says he does, but fears he’s been sidetracked from more useful work — missing out on something else important. The same could be said about all of us.

Translated by Luiz Roberto M. Gonçalves