NewsFlash Articles Data Fundraising BlockBeats Pro

The Fed's "Internal Debate" Goes Public, Powell Counters Brainard's Hawkish Forward Guidance

Read this article in 7 Minutes

Powell's support for the Fed's balance sheet reduction, combined with bond market pressure, has increased the market's need for clarity in Fed policy communication.

Original Title: "Fed's 'Internal Debate' Made Public, Bullard Counters Powell's Downplaying of Forward Guidance"

Original Author: Yi-Long Bao, Wall Street News

An internal debate is unfolding within the Fed on its monetary policy communication approach, with the core disagreement being: how much forward guidance should the central bank provide to the market?

Wall Street News reported that Fed Governor Bullard gave a speech on Thursday at an event hosted by Reuters, where he specifically elaborated on his stance on the central bank's external communication. He stated that effective monetary policy communication should focus on three objectives: the current policy stance, policy outlook, and forward guidance in specific circumstances.

Bullard's explanation was in response to Chair Powell's earlier metaphor of "playing the game rather than watching the referee." Powell's original intention was to encourage investors to pay more attention to the economic data trends rather than closely following the Fed's policy path itself, which was widely interpreted as a clear rejection of forward guidance.

However, Bullard countered with a baseball analogy of a "good pitch," arguing that the market does not need the referee to make a mechanical call on every pitch, but it must have a basic framework of expectations of "what is a good pitch and what is a bad pitch."

In his speech at last week's Jackson Hole symposium, Powell had softened his stance, emphasizing more clearly that the Fed would act on inflation above target, but still insisted that the Fed is unable to "provide a mechanistic, formulaic answer."

When Kansas City Fed President Jeffrey Schmid was asked during the symposium if he had participated in the Fed's newly established communication working group, he responded with a "not quite," further highlighting the limitations of internal coordination.

Powell's "Playing the Game" Logic: Downplaying Forward Guidance

Powell's metaphor presented in July of "focusing on playing the game rather than watching the referee" is primarily aimed at questioning two types of tools: one is an overly explicit reaction function (such as strictly following a Taylor rule-based policy response), and the other is the usual sense of forward guidance.

Powell's logic implies a judgment: excessive reliance on forward guidance would weaken the Fed's ability to flexibly respond to data and could potentially leave the central bank passive in the face of rapidly changing economic conditions.

Powell had previously pledged to reform the way the central bank communicates with the public, including eliminating forward guidance, reducing the number of speeches and official statements. This strategy was criticized by bond investors in July, who believed Powell had not provided enough economic outlook information.

Bullard remains cautious about this. Bullard's view is closer to the traditional central bank communication concept, where transparency itself has the functional value of stabilizing expectations and reducing market volatility.

He does not oppose giving the referee some discretion and agrees that forward guidance is not always applicable.

However, he believes that a completely vague policy framework is equally harmful to the market. His baseball analogy emphasizes that market participants need to have a "rough sense" of the Fed's reaction function, meaning how much inflation or employment deviation from the target would typically trigger action by the Fed.

He emphasizes that clearly communicating the policy direction to businesses and households helps provide the public with more definite expectations. Walle said:

But when it's really needed, I think it should be used.

"Domestic Dispute" Reflects Greater Uncertainty

Wash himself has characterized this debate as a "domestic dispute."

However, this debate is now being played out in public speeches in front of the market, and its impact has extended beyond internal discussions.

Meanwhile, the bond market is in a highly sensitive state. Global yields have risen to their highest levels since 2008.

US Treasury Secretary Yellen announced an expansion of the long-term US bond repurchase program, sparking widespread discussion in the market about the boundaries of policy tools.

With Wash advocating for the Fed to reduce its balance sheet and the aforementioned bond market pressures, the market's demand for clarity in Fed policy communication has become increasingly urgent.

Until there is a unified internal communication framework at the Fed, investors may need to both "play the game" and "watch the referee" at the same time - after all, even the referee is still debating where the strike zone is.