After the Federal Open Market Committee meeting this Wednesday afternoon, Federal Reserve Chairman Jerome Powell will almost certainly be asked in his first press briefing as Chair whether he will be undertaking press conferences after every FOMC meeting rather than just at the quarterly meetings that include the release of the Summary of Economic Projections.
*** While we think Chairman Powell will indeed move to press briefings after every FOMC meeting, on balance, we think he will only affirm on Wednesday that it is under active discussion. We instead think there are a number of internal and external issues the FOMC and staff will first want to work out in some detail, and that it is more likely to be introduced in the second half of this year, perhaps in the context of broader changes in communications policy and the SEPs and the rate dot plot. ***
*** On the March meeting itself, we expect the FOMC to raise rates, while on the Great Debate over a three versus four median rate dot plot for 2018, we still lean towards three. The policy response to the fiscal stimulus is likely to be mostly backloaded into a steeper rate trajectory in the later years of the forecasting horizon (see SGH 3/12/18, “Fed: Backloaded”). We will keep an eye on whether an inflation overshoot is marked into the forecast and whether trend growth is modestly marked up. ***
*** But we in fact suspect Powell may use the March press conference to note how the rate dot plots — which have ironically taken on an outsized market importance after years of being virtually ignored — are not meant as policy guidance, are not a commitment, and that the Fed’s reaction function will be evolving over time with the actual rate decisions made at each meeting. Making every meeting “live” may in fact reduce some of the weight given to the quarterly rate dot projections. ***
Market Implications of “Every Meeting Live”
While we don’t think so, there is still an outside chance the Chairman may announce pressers after every meeting has already been decided and will be implemented starting with the May meeting. We doubt it, but the whole question does bring up a number of interesting issues for both the markets and the Fed itself.
The most immediate and noticeable effect would be in the market moving to price probabilities for rate moves at any of the eight FOMC meetings each year rather than just the quarterly SEP meetings. There has already been some movement in fed funds pricing for hikes around the July and November meetings and even as early as the May meeting. And there has been no small amount of speculation in the Street commentary for the one to pressers after every meeting.
As a first knee-jerk reaction, the announcement alone would probably be taken by the market as slightly hawkish in that it would in theory open the door to the Fed hiking more than just four times in a calendar year. It seems likely, though, to only very marginally add to the overall rate levels of the market pricing if at all, with most of the probabilities for rate moves simply bleeding out of the current quarterly SEP/presser meetings.
One of the issues the Fed staff will be looking at is how opening up the full meeting calendar to potential rate moves may help the price discovery process. There is some sense that with the market forced away from assuming moves only at the quarterly meetings, it may translate into more of an “undulating” movement in pricing rather than the more continuous trading in one direction at present; it could also, in time, have the effect of taking out the volatility extremes to both the upside and downside.
There is also a financial stability factor to be weighed. The primary aim would be to further enhance policy transparency, especially as rates normalization approaches its short run neutral levels.
But the Fed is also painfully aware the “measured” rate trajectory of the 2004-2006 tightening cycle may have contributed to excessive market leverage and the 2007-2009 crisis, so adding an element of uncertainty to when the FOMC may be hiking or passing in this cycle may, in effect, help keep the market more cautiously on its collective toes with a modest increase in volatility.
Changing Internal Dynamics
Opening up every meeting to potential policy moves also carries significant implications for the internal dynamics of how the Chair crafts a consensus, by making trade-offs easier to execute. Committee members, for instance, would know an argument they are making could be picked up at the next meeting in just six or eight weeks rather than a long three months.
Likewise, the Chairman may find it easier to defuse dissents by deferring a point until there is just that one more data. It also makes it easier and smoother, if desired, to signal a policy decision at the next meeting.
It could also change the dynamics of the overall communications policy, and the degree to which other Committee members may influence market expectations. During Chair Yellen’s term, her preference was for deeply researched, well mapped out but fairly infrequent speeches that were more academic in tone.
In the gaps between the speeches, the stream of speeches and public remarks by other FOMC members often had out-sized influence on the markets, sometimes in ways counter or contrary to the Chair’s views or to the Committee consensus. It often led to complaints about the cacophony of Committee views that confused rather than clarified (overlooking for a moment that policy is supposed to reflect a Committee of views, not just a diktat from an all-powerful Chair).
With the greater frequency in the Chairman’s meetings to face questions from the press, there will be more opportunities to clarify how the policy stance is evolving as the data comes in or events force a policy reaction function.
What’s more, each FOMC meeting will invariably entail more internal discussion to agree on the points the Chair should make in the press conferences, and that in turn, may come to mean future remarks by the other Committee members more in line with the consensus view.
That said, going to an “every meeting is live” format could also prove to be tricky and put the new Chairman to the test. Life for Fed officials is in many ways easier when the market is safely pricing in high or low probabilities going into each meeting. With more uncertainty surrounding each meeting, the Chairman could quickly find himself scrambling, for instance, to correct an inevitable “Powell put” chatter on CNBC in the wake of an expected rate hike that didn’t come.
Or the pushback could be in the other direction; in others words, pressers at every meeting may accent whatever is driving the market at the time, requiring an extra bit of messaging finesse.