News analysis

Fed chair Powell's unscripted approach sets up for rocky 2019

WASHINGTON • Mr Jerome Powell had a bumpy first year as Federal Reserve chairman when it came to talking about policy, by turns spooking and comforting investors, even as economic data offered increasingly mixed signals and United States President Donald Trump stepped up his attacks on the US central bank.

And as 2018 closes out with a dramatic slump in stocks and a drop in bond yields, financial markets will need to brace themselves for this year, when Mr Powell is scheduled to make more unscripted public remarks than any Fed chief in history.

A lawyer and former investment banker whose long career in markets and government gave him the real-world perspective Mr Trump sought in a Fed chair, Mr Powell took office last February, determined to improve the Fed's communications with Congress and the public.

He meets frequently with legislators and speaks about policy in a style that is less economics textbook and more folksy than past Fed chiefs, who in recent decades have all been economists.

That style may have been part of his appeal to Mr Trump, but it has arguably contributed to market volatility as investors hang on Mr Powell's every word for clarity on how much further the Fed may raise rates.

Mr Jerome Powell speaks about policy in a style that is less economics textbook than past Fed chiefs.
Mr Jerome Powell speaks about
policy in a style that is less
economics textbook than past Fed
chiefs. PHOTO: REUTERS

"I have people in my building who are just furious about this," said Mr Carl Tannenbaum, chief economist at Northern Trust, referencing Mr Powell's recent description of the Fed's current situation as walking through a dark room.

Though the metaphor was meant to show Mr Powell's appreciation of the uncertainty the central bank faces and a reason for caution, Mr Tannenbaum said it left investors in the lurch. "The problem is, the Fed can't just sit there in the dark. The Fed has to make an effort to shed light on what's going on."

Mr Powell has continued to advertise the Fed's "uncertainty", using the word four times at his Dec 19 news conference, following the Fed's rate hike at its last policy meeting of 2018.

But with Mr Powell sending one set of messages in his remarks - that risks are mounting and rate hikes may need to go slower - while still producing Fed forecasts that show rates continuing to rise this year, "the message in here is a little bit sloppy", said University of Oregon economics professor Tim Duy.

Crystal clear guidance, meanwhile, has its own drawbacks.

At the December news conference, Mr Powell said definitively that the Fed's balance sheet downsizing was on "automatic pilot" and he did not anticipate any changes.

Though the remarks were consistent with past Fed guidance, stocks sank on disappointment that he did not indicate more flexibility.

Several days later, New York Fed president John Williams, a close ally of Mr Powell and a permanent voter on the Fed's policy-setting committee, conveyed a softer approach. Stocks rose.

All Fed chairs have stumbled - and roiled markets across the globe as a result. In 2013, Mr Ben Bernanke sent world stocks plummeting when he suggested the Fed would slow its bond-buying stimulus.

Back in 1996, Mr Alan Greenspan tried to deflate stocks by noting "irrational exuberance" in asset values, though the effect was short-lived.

But past Fed chairs have never operated under the current level of open scrutiny from the White House, with Mr Trump's own commentary roiling markets as well.

Complicating matters further, weaker global growth may threaten what have been powerful gains in the US job market and strong domestic growth.

Add to that a trade war with China and a shutdown of parts of the US federal government over a budget impasse, and the result is a potent blend of uncertainties that have markets betting the Fed will not raise rates even once next year.

It is against this background that starting this month, Mr Powell will hold a news conference after every Fed meeting to provide more clarity about Fed actions and thinking, as he explained when he announced the change last June.

The change will mean that he will hold eight news conferences this year, up from the current practice of four per year.

But the change also increases the odds of a stray market-rankling remark.

It might be a good time to say even more forcefully that the Fed does not have all the answers, said former Fed vice-chair Alice Rivlin.

"That's always difficult," she said, recounting Mr Greenspan's reaction when she used the word "guess" in a speech. "(He) said, don't use the word 'guess' because it sounds like we don't know what we're doing. And I thought well, okay - but we don't."

REUTERS

A version of this article appeared in the print edition of The Straits Times on January 01, 2019, with the headline ' Fed chair Powell's unscripted approach sets up for rocky 2019'. Print Edition | Subscribe