"New Federal Reserve News Agency": A route dispute erupts among the senior officials of the Federal Reserve, how far can Waller's "silence strategy" go?

Internal communication strategies at the Federal Reserve have led to disagreements, with Waller's "less talk" approach facing "resistance" from colleagues.

On October 27, Nick Timiraos from "The New Federal Reserve News Agency" pointed out that Federal Reserve Chairman Waller's push for a new communication style of "silence is virtue" has failed to persuade the majority of his colleagues to follow suit, resulting in the committee sending out noisy and scattered signals to the public, causing market expectations for an interest rate hike in October to plummet from 70% to 15% within just a month.

The article notes that between the end of the last policy meeting and the start of the quiet period for this week's meeting, 16 Federal Reserve officials whose terms have lasted over a year delivered no fewer than 59 speeches, interviews, and public statements, roughly equivalent to about 54 during the same period last year.

This figure indicates that although Waller has deliberately reduced his speaking since taking office in May, other officials have stepped in to fill the void, each expressing their own views.

The direct consequence of the aforementioned disagreement has been clearly reflected in the market. After the Federal Reserve raised interest rates last month, the market inferred a higher likelihood of continued rate hikes from Waller's press conference statements; subsequently, the two vice chairs made statements suggesting they were not in a hurry to act, leading to a significant drop in the probability of an October rate hike.

Kathy Bostjancic, Chief Economist at Nationwide Mutual Insurance Company, stated:

If Waller doesn't speak, others will fill that void.

Communication Route Dispute: Should the Market Be Informed of the "Reaction Function"?

The essence of this debate is not whether to restore a commitment-based forward guidance—almost no officials wish to return to the practices before 2021, when overly explicit interest rate commitments were deemed to have delayed the Federal Reserve's response to inflation.

The article points out that the core disagreement lies in whether officials should still explain to the public how they will respond to economic changes.

Waller's position is clear. He believes that continuously narrating policy outlooks will lock officials into their own predictions while obscuring the signals that the market can convey to the Federal Reserve. He stated in Bangkok this month:

I don't intend to say what I might do at the remaining meetings this year; this is a new chapter for the Federal Reserve, and we are no longer doing that.

Richmond Fed President Tom Barkin, who supports this position, also told reporters that he is "very pleased that this seems to be becoming institutional practice." Barkin consistently discusses economic conditions but rarely comments on specific meetings.

Opposing Voices: Not Explaining the Framework Will Only "Create Noise"

However, several officials have publicly defended the need for more comprehensive communication.

Cleveland Fed President Beth Hammack pointed out in a speech this month that if households or businesses "borrow under a misjudgment of policy direction, the costs can be very high."

In an interview, she emphasized that clarifying one's thinking framework does not equate to making a commitment:

What they hear is not a commitment because I have not made a commitment; I am explaining a framework.

St. Louis Fed President Alberto Musalem directly refuted the logic that "less talk allows the market to focus on data" in a speech in London, stating that a central bank that keeps its framework to itself "cannot make the market focus on data; speculation will only create noise."

He added:

The choice facing the central bank is not between noisy over-commitment and silence but rather between letting the public guess and proactively informing them.

Both Hammack and Musalem, who will assume their current positions in 2024, come from financial backgrounds and have consistently been representative voices advocating for further rate hikes this year.

"Experiment" Faces Reality Check, Former Officials Issue Warnings

This communication experiment quickly faced a pressure test after last month's rate hike.

Nick Timiraos noted that the market inferred a high probability of continued rate hikes in October from Waller's statements and economic data; subsequently, the vice chairs made corrective statements, suggesting they were not in a hurry to act again, leading to a reversal in market expectations.

Federal Reserve Governor Christopher Waller described this episode as highlighting the limitations of significantly compressing forward guidance, stating that this move is akin to "throwing out the baby with the bathwater," and bluntly said:

I can't think of anything that resembles forward guidance more than what happened that week.

Former Federal Reserve Vice Chairman Donald Kohn stated that before sending such a significant signal to the market, he would have previously shared the speech content with then-Chairmen Greenspan or Bernanke for their input.

He noted that neither had ever expressed disagreement. Kohn said:

Current events indicate that at least some committee members are uncomfortable with such a lack of forward guidance because the market is moving in the direction the committee wishes to guide.

Lack of Consensus Among the Committee, Chaos May Continue

Complicating this situation further is that current officials not only have differing views on the economic situation but also have failed to form a unified narrative on policy paths.

The article points out that some officials believe monetary policy is clearly too loose; others view this round of rate hikes more as an insurance response to the risk of entrenched price expectations due to years of high inflation.

Jonathan Pingle, Chief U.S. Economist at UBS, stated that under normal circumstances, the chairman's statements can provide a common language for other officials to reference, and having the chairman speak on behalf of the committee "can bring some coherence, which I believe is currently lacking."

Former Federal Reserve economist Claudia Sahm summarized the current situation as "one of the worst possible outcomes." She said:

No one can force him to speak for the committee, and frankly, he cannot force other committee members to be silent.

Currently, a working group composed of external experts is drafting recommendations on the Federal Reserve's communication methods, expected to be submitted by the end of the year. Waller stated that any adjustments must be decided by the full committee.

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