Janet Yellen says she doesn’t want investors to rely on the Federal Reserve for explicit guidance on the next interest-rate hike -- a communication strategy that’s leaving some flatly confused about the path of monetary policy.
Speaking Monday in Philadelphia, the Fed chair said “only on rare occasions” will the central bank spell out when it’s going to move. “I really think the best we can legitimately do is explain what factors are guiding our thinking,” she told the audience, referring to the Fed’s intention to make policy data dependent.
The challenge with that approach is that it seems to be making it harder to understand the U.S. central bank’s plans. Their intentions are signaled in statements issued after each rate-setting Federal Open Market Committee meeting, as well as subsequent comments by its 17 policy makers that don’t necessarily add up to a coherent explanation of Fed action.
Case in point: Investors were wrong-footed by the Fed’s statement in April, reading it as relatively dovish and then reacting with surprise when minutes published three weeks later showed most officials were inclined to raise interest rates in June.
Investors face another comprehension test at 2 p.m. on June 15 after the next FOMC meeting, when it issues a fresh statement and updates its economic forecasts. Investors can also tune in to Yellen’s quarterly press conference for more clues.
“There is a problem here,” said Charles Plosser, a former Philadelphia Federal Reserve Bank president. “Vacuous” FOMC statements have become the norm as competing camps on the committee thrash out a compromise, he said.
“The desire to reach consensus on the statement makes it more vague and uncommunicative," said Plosser. “That means it doesn’t reveal the true nature of the debate as it could or it should.”
To be fair, the Fed has spent a lot of time thinking about how to improve its messaging. It has a subcommittee on communications, and the FOMC in January discussed changes to its quarterly economic projections to illustrate how much uncertainty lies around the forecasts, according to minutes of that meeting.