Fed: A Note on “Still” Gradual Messaging

Published on November 13, 2018

When Federal Reserve Chairman Jerome Powell delivers his latest views on monetary policy and the economy tomorrow night in Dallas, he will be doing so with a remarkably firm majority consensus of the Federal Open Market Committee behind him. But the question for the moment is whether that consensus is already leaning towards dovish signals of only “some” further gradual increases in the policy rate.

*** Vice Chairman Richard Clarida did seem to go out of his way to slip into his recent debut speech — twice — the “some” refinement to the further gradual removal of monetary accommodation language. But we don’t think such an overtly dovish messaging is in the Powell playbook, at least not yet, if at all, and especially in tomorrow night’s looser Q&A format rather than a scripted speech. ***

*** It is perhaps only fair the Chairman may want to soften some of the hawkish edge in his “long way from neutral” remark a month or two ago with some dovish tones of his own. But we think he is more likely than not to steer clear of any overt near term policy messaging and instead stick to the Fed’s data-dependent language on the new rate path. ***

Occam’s Razor and the Statement

While we have no hard view on what Chairman Powell is likely to lay out in his remarks at the Federal Reserve Bank of Dallas conference with its President Robert Kaplan tomorrow night, the singular question we get is whether he will pick up on the more dovish tones to the recent speeches by both Vice Chairs, Randall Quarles and Richard Clarida.

Quarles, on the one hand, asserted his optimism on supply side gains that may lift the economy’s potential growth while Clarida offered a rhetorical but dovish questioning of whether NAIRU may in fact be lower than the current median estimates as well as the coded language about “some” further gradual removal of monetary accommodation.

Chairman Powell might go that route, but if he does, we would be surprised if he opted specifically for the “some” phrasing to tweak the messaging on the Fed’s near term policy path.

His style to date has been to take an Occam’s Razor to the statements, simply deleting altogether other boilerplate dovish sentences from the Yellen-crafted statements (the “below normal neutral” and the “policy still accommodative” language) rather than fine tuning them with sequential tweaks. So to do so now would seem out of place with the general direction of the movement away from forward guidance language.

We suspect it might also create some near term messaging difficulties. For one, it feels a little too early so soon after President Trump’s remarks about a “gone crazy” Fed, or the most recent stock market gyrations when the Fed is striving to put some distance between it and both the White House and the CNBC chatter of a “Powell put.”

And it would also detract from the high probability pricing for the December meeting hike, which we would assume the Fed is quite happy to see. Equally, Fed officials are not entirely displeased with the market’s “unbridling” from stretched valuations, as incoming San Francisco Fed President Mary Daly put it the other day.

To the Fed, the drops in equity prices, or a rise in the term premium or some credit spreads, may prove painful to some investors, but inits broader systemic perspective best laid out by former Fed Governor Jeremy Stein, it dampens the risk of excesses that could portend financial instabilities down the road.

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