Clive Crook: The Fed must fix its communication problem
Subscribe to enjoy similar stories. The US Federal Reserve has begun one of its reviews of “monetary policy strategy, tools and communications." December’s cut in interest rates and investors’ reaction to it underline just why such a review is needed. Consider how the latest policy announcement unfolded.
It had three main parts. First, the Fed cut 25 basis points from the policy rate, bringing it down to a range of 4.25%-4.5%. Second, it said progress in curbing inflation was going more slowly than expected.
Third, it projected fewer rate cuts next year than it did previously. Investors saw this combination as a “hawkish pivot"—meaning a tightening of policy despite the rate cut—and dumped shares. It seems we have a failure to communicate.
Much as I admire Fed Chairman Jerome Powell and his colleagues—the “soft landing" they hoped to engineer has been going well—the way the Fed signals and executes changes in policy is making an already difficult job harder than it needs to be. Before the policy meeting, financial markets had firmly priced in the quarter-point cut, in large part because the Fed’s earlier messaging had encouraged them to do so. Investors therefore gave less weight to recent data pointing to slower-than-expected progress on inflation.
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