FORECASTS & TRENDS E-LETTER
by Spencer Wright
November 14, 2023

IN THIS ISSUE:

1.  The Fed Used To Be Secretive

2.  The Creation of “Fed Speak”

3.  Where “Fed Speak” is Headed

The Fed was a completely different animal in the 1970s. Notable bond trader Richard Stuttmeier wrote,

“It's a different world than in 1972. When I began my career as a bond trader at one of 12 primary dealers, Arthur Burns was the Fed chair. Fed policy at the time was much more direct, but considerably less transparent.

Policy changes were handled in secret, with tactics implemented through the Open Market Trading Desk of the New York Federal Reserve Bank, which bought and sold securities through primary dealers to achieve the desired federal funds rate.

Rate decisions weren't announced publicly after each meeting of the Federal Open Market Committee, so traders had to pay attention to the market. When the Fed bought securities, it increased the amount of money in the banking system, which tended to bring the rate down. And vice versa.”

Think about that as compared to how vocal the Fed is today. I like to think of these past years as the Fed’s good old days.

The Fed Used To Be Secretive

Do you remember the briefcase indicator? When Alan Greenspan was chairman of the Fed, meetings were conducted in secret. The financial press would try to guess at the Fed rate decision based on the heft of Greenspan’s briefcase. I’m not kidding.

The Fed always operated in secret. The Fed wielded a carefully cultivated mystique as an independent and necessarily opaque guardian of the financial system. Everyone accepted this. That is until 2008.

In the immediate wake of the financial crisis there was a lot of finger pointing. Ben Bernanke sought to calm the situation and help restore stability by enhancing the public visibility of the Fed. It is from this effort to restore confidence in the system and reassure the public in the wake of near financial collapse that the Fed policy of transparency was born.

So, over the past four decades we have moved from total Fed secrecy to near daily Fed spoon-feeding. And this is better? Well…it’s certainly different and complicated. Sometimes better but also at the same time way too much.

The Fed was successful in calming markets and restoring public trust in the institutions of financial power post 2008. There were press conferences and interviews with the Fed Chair as well as the constituent members of the board of governors. This novelty alongside very accommodative and very public Fed policy became the basis for the ’new normal’.

Policy-wise we were introduced to Quantitative Easing, asset purchases and the zero-bound. The Fed had never engaged in wholesale asset purchases before, effectively placing a bid in under the markets.

The Creation of “Fed Speak”

Janet Yellen expanded upon this, holding lengthy press conferences after Fed meetings. She was in general more visible and more available to the media as were the Fed governors. Their words moved markets. Their words created volatility. Their words created a new type of uncertainty. Welcome to ‘Fed Speak’, statement word count and parsing.

If the goal of the Fed’s new normal is transparency, why do we have ‘Fed Speak’? What is ‘Fed Speak’? Thanks to Axios for an example.

When the Fed says: "The median inflation projection of FOMC participants is 4.3% this year and falls to 2.7% next year and 2.3 percent in 2024; this trajectory is notably higher than projected in December, and participants continue to see risks as weighted to the upside."

What they mean is: We think the rate increases we're planning will be enough to get inflation down, but we have no idea how long that's going to take. And we're nervous that inflation will be higher than we expect, rather than lower.

This is a tame example. The Fed can be much more convoluted than that. This is, of course, intentional. But why? If the goal of the Fed is to be more transparent, then why not speak plainly? Because the goal is to be more (read partially) transparent…which to the Fed means remain partially opaque. Full transparency is a non-starter. It will never happen. A fully transparent Fed would not be able to retain its necessary mystique and would not be able to effectively respond to crises as they emerge. The Fed requires the flexibility that ‘Fed Speak’ and the considerable equivocation that comes with it can offer them.

Where “Fed Speak” is Headed

In my opinion the Fed talks too much. Last week there were multiple Fed governors speaking as well as Jerome Powell who spoke no less than three times. This frequent ‘jaw boning’ can and has caused volatility in the markets and general confusion.

Is the new Fed transparency better than the older, far more opaque policies of the 70’s and 80’s? In my opinion it is not. I think that the parsing game the Fed is forced to play due to the new policies is too disruptive and open to interpretation. The Fed has no mandate to manage the stock market. The stock market is not the economy (No, really!). Yet a given turn of phrase or ‘tone’ from a Fed speaker and the markets either flush or soar. This is not what was intended.

If the Jekyll Island conference and the panic of 1907 gave us the Federal Reserve and the global systemic failure of 2008 gave us the new transparency and the interventionist policies that came with it, what evolution for the Fed will the next crisis hold?

I don’t know. But we will all find out. Hang on.

SPECIAL ARTICLES

A Fun Quiz on Fed Speak from the Atlanta Fed

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