“It’s easy to have a pretty confident view, so I think the plain-spokenness probably works right now,” said Michael Gapen, chief U.S. economist at Barclays Capital Inc. in New York. He noted that Powell is less clear about the longer-term outlook. “Is that because it’s the long run, or because making policy restrictive is uncomfortable territory for them? We’ll see.”
As rates move gradually toward a restrictive setting, Powell’s Fed is staring down an epic communication challenge: They’ll need to convince Americans and a president prone to public outbursts against enemies that hikes are intended to help the economy, possibly by restraining it.
Political Pressure
The Fed now expects to lift the fed funds rate above its long-run level in 2019, which means that they could begin actively curbing growth next year. That’s a tough policy to carry out: Officials expect to push the unemployment rate up by a full percentage point in the longer run, from 3.5 percent in 2019 to 4.5 percent.
To put that in perspective, 1.2 million people who have a job at today’s 3.8 percent unemployment rate would lack them if joblessness were at 4.5 percent, all other things being equal.
Painful rate hikes have historically spurred backlash, both from lawmakers and from the public. Chair William McChesney Martin was pressured by the White House over his monetary policy. When Paul Volcker lifted rates to tackle America’s high inflation in the 1980’s, carpenters mailed wood to the Fed chief -- saying it was no longer needed for building because no one was buying houses.
While the modern Fed is projecting a far milder overshoot on rates compared with the Volcker years, it could still draw unwanted attention. Dan DiMiccio, a Trump ally and former adviser, tweeted on Wednesday that the Fed’s rate hike and quicker projected hiking path was a “big mistake.”
Real Threat
Political threats to the U.S. central bank aren’t to be taken lightly. While the Fed is independent of the executive branch and lawmakers can’t intervene in monetary policy, they can legislate to change the Fed -- and there’s some appetite to do so, as regularly introduced “audit the Fed” bills attest.
Plain, optimistic communication could help the public to understand the Fed’s rationale, but it can only go so far.
“Plain-spoken or not, there’s going to be some flak when the Fed starts pressing on the brake pedal,” said Carl Riccadonna, chief U.S. economist at Bloomberg. “You start dumping cold water on the economic gains of tax reform? President Trump is not going to be a happy camper.”
This article was provided by Bloomberg News.