They don’t call it the Federal Open Mouth Committee for nothing.
That’s the nickname traders have given to an increasingly vocal Federal Open Market Committee, the Fed’s policy-setting body. Over the years, the central bank has made considerable strides in improving transparency and communications, even if the cacophony of public pronouncements sometimes devolves into a range of competing policy messages that confuses more than clarifies.
Keep in mind, the Fed did not start publishing its interest rate decisions until 1994. Before then, traders had to look at movements in the Treasury bond market to figure out what the central bank was trying to do to the supply of bank reserves.
Under Alan Greenspan’s 18-1/2 year tenure, there was greater communication with markets, but it mostly came from the Chairman himself. Ben Bernanke instituted a more collegiate environment that current Chair Janet Yellen has extended. This gives a greater voice to other board governors and regional Fed officials, who make frequent pronouncements.
On Friday, May 5 alone, three top Fed officials are giving remarks: Yellen, her Vice Chair Stanley Fischer and San Francisco Fed President John Williams. The Labour Department will also be releasing its monthly employment report for April.
Torsten Sløk, economist at Deutsche Bank, has kept meticulous track of Fed communications down to the individual speech. His findings are revealing:
“In 1996 the average FOMC participant gave four speeches per year, see chart below. Today, the average FOMC participant is on track to give 14 speeches in 2017,” Sløk writes in a research note.
“The risk with too many speeches and thoughts and voices is that the central Fed narrative gets lost in academic discussions of stock versus flow effects, sophisticated inflation models, and complicated arguments for raising short rates versus shrinking the Fed balance sheet,” Sløk adds.
Still, Sløk manages to find some upside to the chatter.
“Maybe the consequence of the significant amount of Fedspeak is that markets are overwhelmed by information, arguments, and analyses, and end up concluding that the Fed has thought about all aspects of their exit, so they probably have things under control,” he proposes. “If that’s the result then increased Fed talk is probably a good thing.”