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- 📢 A smaller Fed megaphone
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For eight years, the world got to know Jay Powell.
His salt-and-pepper hair. His dry humor. His Grateful Dead obsession.
More importantly, Powell ushered in an era of extreme transparency from the Federal Reserve. Verbose speeches, long and winding press conferences, and pontifications about the future. He made monetary policy a meme in the best way (hello, money printer). When the economy felt out of balance and markets were spiraling, he’d often soothe our fears with well-timed public comments.
During Powell’s reign, words became a de facto policy tool.
And by some measures, this tool was effective.
Powell managed to guide investors through a once-in-a-lifetime pandemic and a historic inflation crisis with similar – and sometimes calmer – stock market swings than his predecessors.
Now, there’s a new interest-rate superhero in town.
And he’s not a fan of small talk.
Kevin Warsh, the new Fed chair as of last month, is aiming to reshape the Fed’s approach to transparency. Fewer projections, fewer pressers, fewer pontifications. More task forces, apparently.
Last week, in Warsh’s public debut as chair, he released the shortest policy statement since 2007 and sent a clear message in the press conference afterward. Inflation will come down, and the Fed has this under control.
Why? Because I said so.
Hold on a second. If you’re wondering what the Fed actually does – read this primer.
If you’re already clued in, skip this section. I won’t be offended.
How the Fed works, in 30 seconds:
Many of us know that interest rates are what you pay to borrow money. Or, what people (or banks) pay you to borrow your money.
Few understand that a small group of academics in DC – the Fed – has a big hand in setting these rates.
The Fed exists to balance the economy through interest rates and other nifty tools in order to keep Americans employed and able to afford things.
The Fed’s biggest tool is the Federal funds rate – the rate banks pay to borrow overnight from other banks. They adjust this main rate through cuts and hikes to either stimulate or cool down the economy.
Here’s how it works.
A lower Fed rate typically means cheaper loans for consumers and businesses. And when borrowing money is easy and cheap, you’re less incentivized to save and more willing to spend and invest. The increase in spending juices the economy, boosts innovation and lifts spirits.
The opposite is true, too. A higher Fed rate typically leads to more expensive loans across the board. Higher rates lead to less borrowing/spending/investing, and more saving – essentially putting the brakes on the economy. Typically, the Fed will increase rates when the economy is growing so fast that inflation becomes a problem (a la 2021-2022).
I’ve written a lot over the years about the Fed’s megaphone, and how Wall Street has come to rely on it as a buffer against any interest-rate surprises.
Essentially, Powell started socializing potential policy moves in public conversations long before policy actually changed. He never made promises, but he would openly talk about “the balance of risks” – the good and bad trends the Fed was watching, and how these trends could factor into the Fed’s decisions.
Diligent Fed watchers could get to the point where they could read the tea leaves in what Powell said – and didn’t say – in order to gauge where interest rates could head next.
His megaphone helped markets anticipate change, evidenced by the two-year yield’s head start around the end of hikes in 2023 and the beginning of cuts a year later.
The focus on communication before action was all about setting expectations. Feeding market participants small doses of change instead of walloping them in the stomach with a surprise.
To be fair, this transparency often turned into mixed signals and confusion. Some days, it felt like every Fed participant was saying something loud about future policy. I found myself constantly having to step back and remind myself who was saying what, and if they were worth listening to.
But on the whole, hearing about how each Fed member thought about policy helped the world better understand what it would take to make a change.
Now, Warsh is behind the podium. He has long been a critic of how vocal the Fed has become. So much so, he’d argue, that investors would unnecessarily galaxy brain economic trends. Wall Street would ultimately brace for how the Fed would react to a data point, not the data point itself.
One meeting in, and the rollback in communication has been stark. The Fed’s statement was about a third of the length of Powell’s last statement in April. There was no detail on how contested the decision to hold rates steady was, or much color on changes in important trends since the prior meeting (not for a lack of news, I can assure you that).
Source: Bloomberg
At the end of the statement, there was a line noting that the Fed will deliver price stability. As in, we’ll do our jobs and you’ll do yours. No further questions, please.
I understand that a new Fed chair needs to establish credibility, and that every leader should have their opportunity to put their fingerprint on an organization.
But at this juncture, I can’t help but wonder if less transparency from the Federal Reserve may be horribly misguided – and we could all pay a dear price for an intentional void of information.
Wall Street certainly thinks so. On Wednesday, the S&P 500 fell 1.2% – with the majority of the drop happening after the Fed’s announcement was released. The two-year yield rose the most on a Fed day since March 2008. Markets were caught off-guard by Warsh’s scant explanations on a confusing economic situation.
After all, inflation and the job market are both arguably at risk, and bond traders have switched from expecting cuts to hikes in the past two months. You’d think some guidance would help smooth the pain in such a critical transition.
This is more than just nerdy economic banter. Interest rates impact how we all think about money – whether we realize it or not.
The Fed – as one of the most prominent drivers of interest rates – is an institution we need to trust. Otherwise, we may get more surprises, which lead to fractured markets and deeper rifts if policymakers need to step in quickly.
Or perhaps it’s a more calculated return to the world pre-Powell (and Yellen/Bernanke/Greenspan), when the Fed operated in the shadows and Fed day watch parties weren’t a thing. Maybe I’m just salty about there being fewer press conferences. I love new information.
In an age of social media and radical transparency, disclosure is the default. You can find more than you can ever want online. Influencers document every minute of their day. Trust is built on transparency.
The Fed now seems poised to challenge that.
And your investments are part of the experiment.