ATLANTA (Reuters) - Fed Chair Jerome Powell’s hope for a more plainspoken approach to his job may have landed him in hot water with markets and require more “nuance” going forward, a former top Fed official said on Thursday in a critique of the current U.S. central bank.
As the Fed begins a broad review of its operations, former Fed Vice Chair Donald Kohn said in what he called a “memo” that Powell and an array of other Fed officers needed to overhaul how they communicate so both investors and the public have a better sense of the central bank’s job and policies.
A plain English approach to describing the Fed’s management of interest rates and inflation, a process that is part science, part art and part public psychology, “can be tricky, as we’ve seen of late,” Kohn, now a senior fellow at the Brookings Institution, said in remarks at a conference on Fed policy organized by George Mason University’s Mercatus Center.
“Chairman Powell needs to be careful that plain English doesn’t become the enemy of necessary nuance.”
The Powell Fed’s hallmark emphasis on “data dependency,” or setting policy around the flow of economic statistics with less reliance on the guidance of economic models, could “result in shifting messages and policy volatility,” he said.
Powell, whose offhanded way of speaking in recent appearances left aspects of Fed policy uncertain and seemed to contribute to market sell-offs last fall, will ramp up his public appearances this year by holding press conferences after each of the Fed’s eight annual policy meetings beginning this month.
He has also put open question-and-answer sessions on his calendar, including one on Friday morning at the American Economic Association meeting here, and emphasized the importance of justifying the Fed’s actions to the broader public.
He will speak at a particularly volatile period, with President Donald Trump unhappy with the Fed’s interest rate hikes, global growth slowing, and doubts among investors about whether the U.S. recovery can continue.
Bond markets of late have given troubling signals, with the 2-year Treasury bond yield on Thursday briefly dipping below the Fed’s short-term target policy rate. That has traditionally been a sign investors expect the central bank will be forced to cut rates in the near term rather than continue raising them.
Kohn, a career Fed employee and PhD economist, was named to the Fed’s Board of Governors in 2002. He helped develop policies used to combat a deep financial crisis and recession as vice chair from 2006 to 2010.
He hearkened back to some of those strategies in his remarks, saying for example that a single appearance on a major network show like CBS’ “60 Minutes” - used by former Chair Ben Bernanke at a key point in the crisis - “reached a broader set of people than 100 appearances on CNBC,” the cable business network where Fed officials often appear.
“They should consider doing more of this,” Kohn said.
He said the Fed could also be clearer about how it does business by focusing more on the uncertainty around its deliberations, by downplaying policymakers’ quarterly estimates of future interest rates, and deemphasizing the median of those estimates as holding any particular meaning.
The many public appearances of the Fed’s 12 regional presidents, Kohn said, show the central bank’s face around the country, but too often highlight differences in what each of them think rather than focusing on the larger logic behind central bank actions.
“Public understanding of the policy process would be helped by concentration on the story behind the (Federal Open Market Committee’s) policy choices and expectations rather than on, for example, the precise number of rate increases an individual policymaker expects next year,” a staple element of some reserve bank officials’ speeches, Kohn said.
Reporting by Howard Schneider; Editing by Richard Chang