MarketWatch photo illustration/iStockphoto, Bloomberg What Powell could be thinking, if this obviously doctored illustration is anything to go by.
Nine months after taking office, Federal Reserve Chairman Jerome Powell and his colleagues are not getting such high marks for their communications skills.
“Where we think the FOMC has gotten it wrong in communicating its intentions,” said Richard Moody, chief economist at Regions Financial Corp. in Birmingham, Alabama.
Moody said the mistake as been for Powell and other officials to talk about “going past” the neutral level of short-term interest rates.
“If the markets are rattled by anything, that’s it,” Moody said, in an interview.
In early October, the 10-year Treasury note TMUBMUSD10Y, -0.40% rose sharply and investors dumped stocks DJIA, +0.26% after Powell said “we may go past neutral. But we’re a long way from neutral at this point, probably.”
Estimates of neutral are anywhere from 2.5% to 3.5%, noted Lindsey Piegza, chief economist at Stifel.
Read: Markets may have overreacted to Powell’s ‘long way from neutral’ remark
Powell and other Fed officials have made clear they’re not sure what the neutral level is, but at the same time also are discussing pushing past it.
“The message is, ‘we don’t know where we’re going, but we’re going to keep going,’” Moody said.
“How about, ‘we decide what we think neutral is, get there, see what the world looks like at that point, and then decide whether or not going further is warranted,’” he said.
Another puzzle, Moody said, is that the Fed has a clear alternative to talking about neutral that they rarely discuss.
Real short rates, or nominal rates adjusted for inflation, are at zero.
So it’s obvious that such low rates are incompatible with the unemployment rate at 3.7% and falling.
“That’s an easy case to make,” Moody said, as it is clear look at real rates the Fed needs to move a few more times.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, thinks the Fed is mistaken for a different reason.
He said the Fed is running with an “illusion” that their gradual rate hikes - half of the pace of 2004-2006 - “somehow will eventually stabilize the economy in some kind of semi-permanent sweet spot.”
“It would be a huge leap for the Fed now to suggest that they’re seeking policy to become restrictive. That change is coming but not yet,” he said.
In September, Powell announced he had asked new Vice Chairman Richard Clarida to run a subcommittee on communications issues.
Clarida was chided in a Forbes article for declining to comment after a recent speech about what the subcommittee was going to do. Fed watchers don’t expect many communications surprises after their two day meeting wraps up later Thursday.
“The Fed will just repeat the core of the September statement, signalling further gradual increases in rates with risks to the economy roughly balanced while inflation expectations are little changed,” Shepherdson said.
Read: Fed to remain stoic in face of market gyrations
