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Too Much Talk

Phil Kernen

OVER THE PAST 25 years, the Federal Reserve has become more transparent than ever. Much of this is the result of political pressure. Still, the Fed has taken it further, believing greater transparency to be a good thing in helping the public understand the likelihood of future policy changes. Talking more may have helped us move past the 2008 financial crisis. But it isn’t helping us now.

Congress created the Federal Reserve in 1913. The Fed is nominally independent but must answer to Congress, which can change the rules under which it operates or dissolve it altogether. For the first 60 years, Congress granted a great deal of latitude to the Fed, which communicated as little as possible, believing that transparency made policy less effective. Market participants could only divine policy decisions based on open market operations.

That changed in the late 1970s, as inflation breached 10% amid an 18-month recession. Congress revised the Federal Reserve Act to forcibly impose new disclosure requirements on the Federal Reserve after the Fed’s policymakers rejected repeated requests to explain themselves publicly.

In the 1990s, Congress raised the issue of greater transparency again. The Fed’s degree of insularity was such that it took years for lawmakers to determine that the Fed even kept transcripts of its deliberations. When the Fed rebuffed Congress’s request for those transcripts to be released regularly, Congress threatened to legislate again. The Fed eventually complied by releasing a post-meeting statement and the meeting transcripts themselves, after a lag.

Over the next decade, the Fed took steps toward greater transparency, augmenting the disclosures required by Congress. Self-mandated communication grew by leaps and bounds following the 2008 financial crisis, when traditional monetary tools proved far less effective and were quickly cast aside in favor of new approaches.

Many of these new monetary tools relied on verbal guidance from the Fed to help set public expectations. This meant talking more, giving more speeches and engaging in more interviews. It worked well when the plan was essentially to keep interest rates lower for longer. The same idea was behind the 2% inflation target offered up publicly in 2012, following a long debate about inflation that had started in the mid-1990s.

But a turning point came in late 2018. For two years, the Fed had been slowly raising interest rates. Fed Chair Jerome Powell gave an interview stating that the U.S. economy was “a long way from neutral,” meaning the point at which interest rates are neither spurring nor slowing economic growth—and thus interest rates would potentially be raised further.

Stock markets and President Trump registered their displeasure at his remarks. The latter let loose a series of disparaging tweets, breaking with a tradition that kept presidents removed from commenting publicly on monetary policy.

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Meanwhile, the stock market fell 13%. The Fed raised rates for the last time in December 2018. The economy hadn’t fundamentally changed. It was still growing slowly, but public pressure took control of the Fed narrative. Reflecting that pressure, the Fed ushered in a series of interest rate reductions in 2019, even before the onset of the pandemic in 2020.

We now sit nearly two years into the pandemic. The U.S. economy is expanding modestly due to growing consumer demand, with supply chains that can’t keep up. The Omicron COVID variant is the current challenge. Others will follow. Fiscal policy is uncertain and inflation has taken root, forcing the Fed to react.

The transparency, which served the public well when the Federal Reserve could better see the future, isn’t helping now. Things are moving fast, conditions are changing quickly and the Fed’s policymakers are working on a meeting-by-meeting basis.

Their public commentaries, interviews and speeches don’t help clarify matters. They’re thinking aloud and trying to develop their views in a public forum. They can’t tell us where rates will be six to 12 months from now. We are in uncharted waters, and Fed officials have no better idea than anyone else.

The Fed must meet the politically mandated transparency required by Congress. Beyond those minimum expectations, however, it’s time for the Fed to walk back some of the communication methods adopted over the past decade. In being transparent, sometimes you can say too much and cloud the message you’re striving so hard to clarify.

Phil Kernen, CFA, is a portfolio manager and partner with Mitchell Capital, a financial planning and investment management firm in Leawood, Kansas. When he’s not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via LinkedIn. Check out his earlier articles.

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Liarspoltergeist
Liarspoltergeist
8 months ago

Look at FRB Balance Sheet growth since 2020. They threw Trillions of paper into the global inflation flames

Guest
Guest
8 months ago

While I agree the Fed has become more transparent over the years it’s not as though they are doing so based on more accurate data than the market. The Fed has literally hundreds of PhDs with access to massive amounts of data but their conclusions are no better than the bond market. I’ll continue to watch the bond market to get a sense of the future of interest rates instead of relying on what the Fed tells us.

Last edited 8 months ago by Guest
JoeBlow
JoeBlow
8 months ago

.. under the Biden Administration you will never get transparency just more lies. Or.. additional free money printed out of thin air which devalues the dollar further. The ‘Fed’ is the problem

booch221
booch221
8 months ago
Reply to  JoeBlow

Joe Blow is a good name for you.

Mik Cajon
Mik Cajon
8 months ago
Reply to  JoeBlow

Agree…woke is broke i.e. blue states.

ostrichtacossaturn7593
ostrichtacossaturn7593
8 months ago

Great summary on the fed, Phil. Thank you!

As you know, HumbleDollar emphasizes a low-cost index fund approach. Would you consider writing an article about your firm’s investment philosophy as stated on your website: “WE ARE ACTIVE INVESTMENT MANAGERS: We are active investment managers and believe owning strong companies increases the odds of reaching your goals.” I realize that Jonathan determines which articles are published, but if actual return data on your recommended portfolios based on periods greater than 10 – 15 years is available, many readers would likely be interested in this kind of information as a comparator, especially from your expertise as a CFA.

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