“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I said.”— Former Fed chair Alan Greenspan
Jay Powell doesn't know what he's going to do with interest rates. He probably hasn't made up his mind about what he's going to do at the next meeting, which starts on June 18, and he certainly doesn't know what he's going to do on July 31 or September 18 or October 30.
- Markets are pricing in significant rate cuts in the second half of this year. The consensus seems to be that the cuts will start in September, probably with a 50bp decrease, but there's no great confidence in that forecast.
The uncertainty is deliberate on the part of the Fed. Depending on how you look at it, it's either a relatively new development or rather old-fashioned.
- Context: Powell and his colleagues could easily signal an expected future path for interest rates if they wanted to. In late 2011, then-chair Ben Bernanke introduced the "dot plot" as a way to communicate even more clearly just how long he expected to keep rates at zero. In general, the Fed has become more transparent and predictable over time, issuing longer statements and being more explicit about interest-rate policy.
- What they're saying: Powell and his colleagues regularly stress "data dependence" in monetary policy and are increasingly vocal about their distaste for the dot plot. They're honest about the fact that they don't know where the economy is headed; they don't know what unemployment rate constitutes full employment; and they don't know where interest rates must be, over the long term, to ensure price stability.
After the crisis, the role of the Fed was clear: to rescue the economy and prevent it from imploding. Today, policymakers need to decide whether they should cut rates as a form of recession insurance, and whether they should frame any rate cut as a one-off or as the first of a series. They need to determine how much attention to pay to markets, which will throw a tantrum if the expected rate cuts don't materialize — and also how much attention to pay to politics, in a world where Fed policy has become politicized to an unprecedented degree.
The bottom line: We're not going to go back to the world of the early 1990s, when the Fed wouldn't even say what level of Fed funds it was targeting. But in an uncertain world, expect Powell to continue to embrace constructive ambiguity.