The Federal Reserve came under fire from Wall Street for sowing “confusion” in the wake of a market-moving speech by one of its top officials, highlighting the communications challenge facing the US central bank as it moves towards a historic interest rate cut.
The furore over remarks by John Williams, the president of the Federal Reserve Bank of New York and a key monetary policymaker, comes at a sensitive time for economists and investors as they weigh the scale of the likely monetary easing coming later this month.
Until Thursday, the consensus had been for a 25 basis point rate cut by the Fed, as a limited insurance policy against a weakening global economy and trade tensions. But the odds of a 50 basis point cut soared and US Treasuries rallied after Mr Williams laid out the case for “preventive” action in low interest rate and low inflation environments.
This prompted an unusual clarification from the NY Fed that Mr Williams’ comments were “not about potential policy actions at the upcoming FOMC meeting”, which sent the probability of a more aggressive easing back down to 37 per cent by Friday from 66 per cent on Thursday.
“I think we have too many cooks in the kitchen when it comes to public speaking at the Fed, and it’s sowing seeds of confusion,” said David Rosenberg, chief economist and strategist at Gluskin Sheff, a wealth management firm. “There used to be a time when the Fed was accused on not being transparent enough. Now the pendulum has swung way too far in the other direction, especially at a time when there are so many divergent views.”
The statement from the New York Fed came just hours after one of the most senior-ranking Fed officials, vice-chairman Richard Clarida, signalled the need for easing before the economic data turns increasingly negative, adding another dovish voice to the mix.
For Ebrahim Rahbari, chief G10 currency strategist at Citigroup, the back-to-back scheduling of Mr Williams and Mr Clarida’s public appearances had been notable, prompting him to switch his prediction for the July meeting to a 50bp cut, having previously expected two 25bp cuts over the next two meetings.
“What was in the end very confusing to us was the communication we received seemed in many ways to be a co-ordinated attempt to signal the market given its timing and context,” Mr Rahbari said. “It was just before the Fed blackout period and two of the three most influential FOMC members were speaking.”
Mr Rahbari said the New York Fed’s subsequent intervention meant he was “very uncertain” about the likelihood of a two-notch cut at the next meeting.
On Friday, James Bullard, the president of the St Louis Fed, avoided speaking about monetary policy as he delivered a speech on cryptocurrencies, after already staking out his position that a 50 basis point interest rate cut was not necessary this month in an interview with the Wall Street Journal.
Larry Fink, chief executive of BlackRock, said the central bank would stir concerns over the health of the US economy were it to trim rates by half a percentage point.
“If they did a 50 basis point cut it would probably lead more to an equity panic,” Mr Fink said in an interview with the Financial Times. “It would frighten the market.”
Donald Trump also piled on criticism of the Fed via Twitter, taking aim at the central bank’s “faulty thought process”.
He wrote: “Because of the faulty thought process we have going for us at the Federal Reserve, we pay much higher interest rates than countries that are no match for us economically.”
The US president also explicitly referred to the New York Fed speech. “I like New York Fed President John Williams first statement much better than his second,” Mr Trump wrote.
The heated debate about Mr Williams’ speech comes after Mr Powell had been consistent in signalling the US central bank was ready to cut interest rates, saying it would “act as appropriate to sustain the expansion” in the face of a gloomy global growth backdrop and an ongoing trade war between the US and China.
The Fed chair has been careful not to show his cards on the scale of the easing, however, which could point to real tension between Fed officials about how to proceed.
“We’re seeing a lot of volatile opinions,” said Gershon Distenfeld, co-head of fixed income at AllianceBernstein. “I don’t remember a time in recent history when you had so much rhetoric. The disagreements are usually hashed out behind closed doors.”
Other investors welcome the slew of Fed commentary, no matter how perplexing.
“The more information we can get and the more insight about the Fed’s thinking we can get, the better,” said Mike Ryan, chief investment officer of the Americas at UBS Global Wealth Management.