As Fed Chairman Jerome Powell gets set to deliver his first news conference Wednesday, he has a good example of what not to do from the fairly recent past.
The right way: Answer questions clearly but not too clearly, giving markets just enough to munch on without committing to future policy moves. The wrong way: Well, he only has to look back as far as his predecessor, Janet Yellen, whose first newser was a disaster.
Fed-watchers remember it as the infamous Yellen “gaffe.”
The scene: March 19, 2014, just a month or so after Yellen had taken over for Ben Bernanke. Things had been going well for the first half of the conference, when a Reuters reporter asked a fairly simple question: How long after the Fed finished its bond-buying program — quantitative easing — would it wait to start raising rates.
Yellen’s reply:
So, the language that we use in the statement is “considerable” period. So, I — you know, this is the kind of term — it’s hard to define. But, you know, it probably means something on the order of around six months or that type of thing.
Though she went on to set a number of caveats, all the market heard was “six months.” Stocks sold off, bond yields jumped, and questions quickly arose over whether Yellen had what it took to lead the central bank.
Of course, anyone who watches the Fed knows what happened thereafter. Yellen rather quickly understood the importance of purposeful vagueness and diplomacy, and before long became highly adept at parrying with the press as well as Capitol Hill legislators.
But the lesson was learned: Be careful what you say or the market will pounce.
So with Powell about to take the hotseat, investors are figuring him to take Yellen’s early miscue as a lesson learned and not give too much away.
“Those of us who follow the Fed remember that. She never made the same mistake again,” said Quincy Krosby, chief market strategist at Prudential Financial. “She was always diplomatic, she was always careful. I think he’s also going to be very, very careful.”
In doing so, he’ll have a number of landmines to walk around.
Powell takes over with an economy looking stronger but with political tensions around Washington running at a boiling point. He’s likely to be asked about those, in particular the fears of a trade war from President Donald Trump’s tariffs on steel and aluminum imports, as well as what the path of fiscal policy means.
Fed Governor Lael Brainard, an avowed monetary dove, meaning she favors looser monetary policy and low interest rates, recently caught the market’s attention when she talked about the positive influence more aggressive fiscal policy was having on growth. Specifically, Congress has approved higher spending and lower taxes, and Trump this year is likely to push an infrastructure program that could surpass $1 trillion.
“Many of the forces that acted as headwinds to U.S. growth and weighed on policy in previous years are generating tailwinds currently,” Brainard said in a March 6 speech in New York.
That’s another tightrope Powell will have to walk.
Though the Fed has indicated and the market has priced in three total interest rate hikes this year, there’s a growing inclination that four could happen. Multiple Wall Street economists have upped their projections, and the fed funds futures market was indicating a 40 percent chance of a fourth hike in December, according to the CME. That’s all come amid a weakening backdrop for first-quarter growth that could change expectations for the full year.
“Why at this point would they have to suggest that they’re adamant about a fourth rate hike?” Krosby said. “What the market wants is the economy to be strong enough to absorb the rate hikes. I don’t think [Powell is] going to be specific. That would work for the market.”
What Powell may do is something more subtle.
Rather than point to a fourth hike, there’s growing suspicion that he’ll indicate the news conferences will happen after every meeting, instead of quarterly. That will give the Fed the flexibility to hike whenever it wants as Powell will be around to discuss why the committee acted.
“Such a decision would both increase uncertainty about the timing of Fed moves (thus discouraging leveraged risk-taking in financial markets financed by short term funding) and create a more credible option to hike more than four times a year if needed — the market would read it as hawkish,” Krishna Guha, an economist at Evercore ISI, said in a recent note.
Even then, it will be up to Powell to play the diplomat, indicating that the move is nothing more than to give the Fed flexibility rather than a nod toward tighter policy that the market could rebel against.
In other words, Powell has to avoid the dreaded gaffe.
“He’s confident, he’s poised, he’s fluent, and there’s also a kind of real-world tone to his speech,” Krosby said. “The fact is, he’s a perfect meld of understanding how the markets work, understanding the economy and the relationship between the two, as well as the relationship of the Federal Reserve’s moves to the economy and the markets. He’s very careful, very experienced.”
WATCH: A CNBC survey draws distinctions between Powell and Yellen.
