The overwhelming amount of communication from the Federal Reserve is stoking worries over its potential risks to the stability of financial markets and the global economy, says an influential economist.
What Happened: Noted economist Mohamed El-Erian, in an opinion piece for Bloomberg said in just one week, 11 high-ranking Fed officials delivered 20 speeches, indicating a deluge of “Fedspeak.”
Once a bastion of calculated ambiguity, the Federal Reserve has shifted towards a policy of transparency under the leadership of Ben Bernanke and Jerome Powell. This has resulted in a marked increase in communication, including press conferences, public interviews, and the release of FOMC members’ individual forecasts.
The belief is that transparency is vital for effective forward guidance, which allows smoother transitions for the economy and markets as policies change. However, the sheer volume and nature of this communication have sparked concerns, El-Erian said.
El-Erian stated that the Fed’s excessive data dependency and the frequency of communication U-turns are causing unnecessary market volatility. The central bank’s guidance is often overlooked by forecasters and traders, leading to unexpected market reactions.
Why It Matters: Research by the Center for Economic Policy Research highlighted that market volatility is notably higher during FOMC conferences, particularly those led by current Fed Chair Powell. Findings also suggest a reverse trend in market direction during press conferences compared to initial reactions to the FOMC statement.
El-Erian suggests that both the quantity and quality of Fed communications need a thorough review. More strategic anchoring of views and consistency in messaging are crucial to mitigate the potential market impact of these communications.
Without improvements in these areas, the effectiveness and political autonomy of the central bank could be undermined in the long run, he warned.
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