More thoughts on the new communications strategy at the Fed
Marc Chandler flagged something this morning I wanted to comment on. He wrote:
Whatever thunder the FOMC meeting usually has is being stolen this week by the first of Bernanke’s press conference tomorrow. In fairness, the FOMC’s statement is unlikely to change substantively from the mid-March statement. The press conference has potential to be more disruptive, but even here it is best to keep in mind the distinction between transparency and visibility.
I think that’s right. Ben Bernanke has said he wants to move the Federal Reserve in the direction of greater transparency. Clearly, that means having greater public visibility and giving the press greater access to the thinking behind FOMC policy decisions. Jean-Claude Trichet already holds press conferences as the head of the European Central Bank. So it is reasonable that the Fed chair would do the same.
But there is a difference between transparency and visibility as Marc points out. Remember this: Fed must reveal recipients of credit crisis bailouts from 2008? Clearly, the Fed wasn’t promoting transparency when it came to the bailouts. So you have to see this latest move by the Fed as being about PR more than transparency. The Fed chairman is now crafting the Fed’s public image just as politicians do. The press conference is a part of that pubic relations campaign.
What should we expect then? First, we should expect Ben Bernanke to defend prior Fed policy. This includes the bailouts, the lending to foreign institutions, the quantitative easing, the zero interest rate policy, and the focus on core inflation. We should also expect the Fed chair to pay lip service to watching for signs of inflation.
Bernanke may something like: "commodity price increases are worrying because of the negative effect they have on consumers, especially lower income consumers. But, history demonstrates that commodity price movements are volatile and do not have medium-term effects on core inflation. As such, we at the Fed are much more concerned with keeping core inflation in a range that gives the Fed room for action without precipitating unwanted levels of inflation."
As for the currency wars, Bernanke has consistently said that Fed policy is geared to US domestic economic concerns and that foreign central banks have policy levers at their disposal to manage their own domestic economies. It would be interesting to see whether he makes any passing remarks regarding the benefits of future monetary policy coordination. We saw this regarding the coordinated central bank move to depreciate the Japanese Yen post-earthquake.
John Brynjolfsson of Armored Wolf spoke to Bloomberg yesterday about inflation and the Fed’s messaging. Like Marc Chandler, he sees ‘tail risk’ in the Bernanke press conference event. He expects a quality performance. But If Bernanke is off message in any way, it could be disruptive. Brynjolfsson is also concerned about inflation. Video below.
I will be talking about this issue and other recent financial news on BNN’s headline program with BNN anchor Howard Green and Reuters Breaking Views’ Rob Cox. In terms of other topics, we could talk about the US deficit and some comments made by Tim Geithner on that issue. And there’s the Case Shiller Index, down again today – a lot of stuff. Tune in to the broadcast at 1230 ET. We’ll be up at 12:45ish.
P.S. – On interest rates, I doubt Bernanke will telegraph the Fed’s future rate decisions as they are dependent on the economy and inflation. However, I don’t see how markets can drive yields substantially higher unless we see persistent inflation that draws a rate hike response from the Fed. As I said earlier in the year:
Any market participant could go out into the market and purchases zero coupon treasury strips as an arbitrage against long-term Treasury yield mispricing if long-term rates did not reflect the path of future expected short rates. Let me repeat that: if long-term rates don’t reflect the expected path of short-term rates, you have a sure fire arbitrage opportunity. If the Fed is destined to keep rates at zero percent for the next five years and I am sure of it, but the yield on five-year Treasuries doesn’t reflect this, all I have to do to make money is buy the five-year and sell Treasury strips and leverage that trade up in the Repo market. Isn’t that what some investment banks are doing right now – ploughing their POMO acquired money into a leveraged bet on Treasuries? That is exactly what happened after the first jobless recovery in 1992-1994 before Greenspan caused a huge bear market in Treasuries by raising rates.
A lot of people expect interest rates to spike when QE2 is finished. I don’t unless we see more inflation. In my view, QE is bad policy. The Fed will wind QE down and look to stabilise its balance sheet by reinvesting retiring bonds in Treasuries. Bernanke won’t say this, but I suspect the Fed is done with increasing its balance sheet in June unless we see serious economic problems.