The Fed is stuck in a trap of its own making

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  • Wall Street thinks Federal Reserve Chairman Jerome Powell could move toward holding press conferences at every policy meeting. 
  • Currently, the Fed chairman speaks only after four of the central bank’s eight meetings, which has led markets to rightly suspect no actions will be taken on non-press conference meetings.
  • Because markets might interpret more press briefings as a signal of more aggressive interest rate hikes, Powell may have to wait until later in the year to make the announcement. 

Federal Reserve officials go out of their way to assure financial markets that they could make a policy move at any meeting, not just the four of eight meetings per year that are accompanied by a press conference from the Fed chairman.

However, consider this: Not once since the Fed embarked on holding quarterly press conferences back in April of 2011 has the central bank actually made a policy move on a non-press conference meeting.

This has led Wall Street investors to assume, rightly so far, that there really only four “live” meetings per year, sharply reducing policymakers’ flexibility to take action.

With the appointment of Jerome Powell, until recently a Fed governor and previously a private equity executive, traders have been speculating the Fed might try to remove this implicit policy obstacle by announcing press conferences at every meeting.

But now, the Fed finds itself stuck in another communications trap — if such an announcement were made soon, say, at next week’s press conference (Powell’s first), the market might wrongly interpret this as a signal that more rate hikes might come this year than the three, maybe four moves the market now expects.

“Chair Powell has committed to continuing transparency in Fed communications under his leadership,” wrote Morgan Stanley economists led by Ellen Zentner in a research note.

The Fed first adopted press conferences in response to reports that its lack of transparency was giving some investors with contacts at the central bank an upper hand in the form of early access to key details of the Fed’s highly-market moving deliberations. 

“Moving to a Q&A after every meeting is consistent with that view, but will need to be meticulously laid out so that markets are well prepared —and so that the move alone isn’t taken as a sign the Fed is ready to speed up the pace of hikes,” Zentner and her colleagues write.

Powell’s more off-the-cuff style could also have its pitfalls.

“We have already seen he speaks in a more direct style than past heads and is willing to give his opinion when they tended to equivocate,” writes Donald Ellenberger, senior portfolio manager at Federated Investors, in a blog post. “A superficial concern, perhaps, but it would not be the first time that a slip or strongly worded response would needle the market.”

SEE ALSO: The Federal Reserve is already looking very different under Jerome Powell than it did under Janet Yellen

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