How the Fed’s quest for transparency made markets more volatile

As anticipation for signals around rate cuts intensifies, so has the debate around how the Federal Reserve communicates with the public.  

Economists remain divided on how many rate cuts to expect from the Fed in 2024, despite what Wall Street saw as dovish signals from Fed Chair Jerome Powell in his latest press conference and the Federal Open Market Committee’s most recent statement.

Markets typically respond to Fed comments with price swings in either direction, and recent research shows they are particularly reactive to Powell. A study from the Center for Economic Policy Research found that market volatility during the central bank chief’s press conferences was three times greater than during those of his predecessors. Researchers noted this can be traced to the fact that Powell’s messaging tends to depart from the FOMC statement released after the meeting.  

“It’s urgent [the Fed] start talking in terms of scenarios and risks and contingency plans, because we’re in a world that’s very uncertain,” said Andrew Levin, a professor of economics at Dartmouth College. “When the Federal Reserve makes a series of U-turns — not just one but a series of them, which is what’s happened over the last several years — that undermines public confidence.” 

Levin, who was a special communications and monetary policy adviser to former Fed Chair Ben Bernanke, says dissenting views among policymakers are increasingly rare, and instead of presenting a variety of outcomes and risks, the Fed emphasizes baseline cases. And given the Fed’s “data-dependent” approach, the baseline can change rapidly as new economic reports are released.  

“Unfortunately, what’s happened in recent years is that I think there’s been increasing peer pressure within the Fed, the culture has changed, to really discourage dissent,” Levin said. “So now we’re stuck with a system where there’s only one view, there’s only one outlook, it’s a baseline outlook. And there’s really no way to understand the Fed’s thinking about where are the risks.” 

At his most recent news conference, Powell was asked why there are rarely dissenting views in the policy statement, even when more spirited debates are revealed later in FOMC minutes. Powell responded by saying the Fed is a “diverse group” and that “we have dissents and a thoughtful dissent is a good thing.”  

Watch the video above to learn more about how the Fed’s busy speaking schedule can create market volatility and how it balances transparency with market impact.