Fed Speak, The Taper, and Why Everyone Should Just Chill Out
“Fed speak” was a term first used to describe the way that former-chair of the U.S. Federal Reserve Alan Greenspan would couch the substance of his message (if there was any) in the vagaries of economic jargon. This ambiguity served him like an entropic shield, deflecting criticism regarding the accuracy of his statements and diluting the sting of any bad news so much that the markets wouldn’t know if he said anything worth reacting to.
Whether or not Greenspan’s communication style was strategy or personality is up for debate, but the idea of Fed speak has stayed with market watchers. Greenspan’s successor, former Chair Ben Bernanke, was generally more direct than Greenspan was, but still spoke with the same kind of specialized vocabulary unique to central bankers and totally alien to most people. Despite Bernanke’s attempts at a competent forward guidance, markets still overreacted to benign comments and policymakers still parroted the same questions as the media, as if stuck on loop; first, “when will the taper begin?” and now, “when will the taper end?”
These were and are big, important questions to answer, but the Fed has already provided the only answer it will give. In fact, it first answered the question as long ago as December 2012, but the message was couched in Fed speak and the answer so indeterminate that actually coming to terms with it has apparently proven incredibly difficult.
It’s not a perfect analogy, but one way to think about the economy is as a car. In the first half of 2013, Federal Reserve Bank of San Francisco President John Williams used the conceit, saying that, “Overall, if we were in a car, you might say we’re motoring along, but well under the speed limit.” Williams was referring to the fact that actual gross domestic product growth was, and is, running well below potential. At the time, headline unemployment was 7.6 percent and inflation was flat thanks to low demand, but GDP growth was accelerating and equity markets were rallying thanks to the Fed’s accomodative monetary strategy, which was designed to put downward pressure on interest rates.
“The fact that we’re cruising at a moderate speed instead of still stuck in the ditch is due in part to the Federal Reserve’s unprecedented efforts to keep interest rates low,” added Williams. “We may not be getting there as fast as we’d like, but we’re definitely moving in the right direction.”
So if the economy can be described as a car, then it is a damaged vehicle still in need of repairs after being forced off the road by the late-2000s financial crisis. At one point, the Fed may have been driving, but with the progress of the recovery, the evolution of fiscal policy over the past couple of years, and with the onset of the taper, the central bank has moved into the passenger’s seat to co-pilot, while Congress has moved back into the driver’s seat.
Meanwhile, Main Street and even some on Wall Street are stuck in the back seat asking the only question that they can think of, because in some ways it’s the only question that matters: are we there yet? The same question applies to the idea of achieving healthy and sustainable economic growth and to the end of quantitative easing, which has in some ways perverted financial markets. Congress, driving, has demonstrated that it doesn’t know where the economy is or where it’s going, and has generally seemed to defer expertise to the the Fed. The Fed, co-piloting, has given the same answer all along: we’ll get there when we get there.
This answer is annoying because it’s not actionable, it does little to nothing to dissipate the economic fog of war, but it’s the also the only answer that the Fed can reasonably supply. The Fed has made it clear that the taper timeline is dependent on incoming economic data, and that interpreting that data and drawing the appropriate conclusions is an enormously difficult task that necessarily involves some fuzziness. This means that the Fed can’t detail the taper timeline to anyone because the Fed itself doesn’t know the details.
So the best answer that the Fed has been able to supply is insight into its decision-making process. This has generally come in the form of forward guidance, which is designed to manage the expectations of market participants. Bernanke championed this policy and it lives on through the current chair Janet Yellen.
On February 11, Yellen testified before the House Committee on Financial Services, delivering an update on the economic outlook and repeating much of the same Fed speak that her predecessor delivered to Congress during his tenure. “My colleagues on the FOMC and I anticipate that economic activity and employment will expand at a moderate pace this year and next, the unemployment rate will continue to decline toward its longer-run sustainable level, and inflation will move back toward 2 percent over coming years,” she said, concluding her summary of the economic situation and outlook. “We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook. We will, of course, continue to monitor the situation.”
Yellen emphasized that she expects continuity in the Fed’s monetary strategy. “The Committee said that it would continue the program until there was a substantial improvement in the outlook for the labor market in a context of price stability,” she said, and that’s the policy the Fed appears to be sticking to. It’s the same policy the Fed has championed for at least a year, and it contains the same provision for unforeseen change that it always has.
The Fed has articulated it this way: “In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.”
So the answer is loud and clear. We’ll get there when we get there, and if something unexpected comes along, well, we’ll cross that bridge when we come to it. In the meantime, it makes more sense to focus on fiscal policy and financial regulation than it does to get hung up on monetary policy. The Fed has nothing new to say about it, and hasn’t had anything new to say about it for a while.