Is More Fed Transparency Worse For Markets?

Obviously, Powell taking the helm at the Federal Reserve means potential policy changes, but that’s not the only thing that could change. The Fed’s communication strategy could also change. Its communication is how it delivers forward guidance. It’s arguable that the Fed’s forward guidance is the most important tool it has, so any change to how the Fed uses this tool is very important to monetary policy. Powell’s changes could formulate a legacy which affects how future Fed chairs operate. For example, Ben Bernanke started holding 4 press conferences per year after Fed rate decisions starting in April 2011. Since he left his position, Yellen and now Powell have continued that practice. These press conferences are an important part of guidance (along with the FOMC Minutes).

The other important part of these press conferences is that since 2015 the Fed has only raised rates at meetings where press conferences occurred. This limits the Fed’s ability to raise rates, so as to not shock markets. It’s fair to wonder if the Fed would hike rates 50 basis points at a meeting that has a press conference or hike once at a meeting with no press conference. The market historically hasn’t needed an explanation after every rate change, but if there was a hike without one now, because of the precedent, it would probably shock the market, causing excessive volatility. The goal of monetary policy guidance is to get the market to understand what the Fed is thinking so there’s less uncertainty. The Fed has boxed itself in by only hiking at meetings with press conferences, in an attempt to improve transparency.

Powell Had A Short First Press Conference

Powell’s first press conference was interesting because it was only 43 minutes, making it the shortest one in the 7 year history of them. Since this was his first one, it’s reasonable to expect future pressers will be even shorter. Bernanke’s average presser lasted 57 minutes, with the shortest one being 45 minutes. Yellen’s average presser was 58 minutes. Bernanke and Yellen were PhD economists while Powell has more of a business background. Bernanke and Yellen focus more on economic theory, while Powell is a financial expert who is more of a technocrat.