Is the Fed's Era of "Plain Language" Coming to an End? Powell Takes the Stage for the Last Time on Wednesday

Original source: Jin10 Data

Powell is likely to hold his last formal press conference as Federal Reserve Chairman on Wednesday local time (early Thursday Beijing time) — which may mark the end of the era when the Fed chief regularly engages in Q&A sessions with reporters.

Investors and economic observers closely follow such press conferences. Supporters of the Fed chairman's regular media appearances believe this enables the central bank to shape the narrative around its interest rate decisions and helps the market digest the Fed's policies. However, some critics, including Kevin Warsh, Trump's nominee to succeed the Fed chair, believe Fed officials communicate too much.

Warsh, who could be confirmed before the Fed's next policy meeting in mid-June, has hinted that he might completely stop holding regular press conferences.

Julia Coronado, President of MacroPolicy Perspectives and a former senior Fed official, said this is precisely why Powell's final appearance at the podium on Wednesday is "so significant."

She added: "I expect Powell will defend, directly or indirectly, the values of transparency, of engaging with the public and the press, and of explaining oneself."

A press conference tradition spanning over a decade

Fed officials meet every six weeks (eight times a year) to set interest rate policy. Former Fed Chairman Ben Bernanke first began holding press conferences after some meetings in 2011, initially four times a year.

Bernanke said at the time: "In the past, the mystique of central banking was about not letting anyone know what you were doing."

Powell began holding press conferences after every meeting in 2019, less than a year into his term. Announcing the move, Powell said he wanted to "summarize the state of the economy in plain English," because monetary policy affects everyone. He stated:

"We believe that the overall outcome is likely to be better if we explain as clearly as possible what we might do and why. To that end, we try to communicate our expectations of how the economy will evolve and how our policy stance might change."

Over time, Powell became more cautious when answering reporters' questions.

Vincent Reinhardt, Chief Economist at BNY Mellon Investment Management, said in an email:

"The attention his impromptu answers received exceeded his expectations or desires. Over time, he stuck more closely to his prepared materials. The edges were smoothed, reducing points of conflict, but also reducing the information content."

By 2024, Harvard economics professor Greg Mankiw said Powell's cautiousness at the podium made press conferences a waste of time.

Mankiw wrote on his blog: "When the Fed chair answers reporters' questions, he seems to convey as little information as possible using as many words as possible." He added, "From the Fed's perspective, an ideal press conference would contain no news, consisting mainly of repetition and platitudes."

"If you're going to hold a press conference, you need to have some important news to announce"

Testifying before the Senate Banking Committee last week, Warsh hinted he might adopt Mankiw's advice.

When asked by Senator Ruben Gallego (D-AZ) whether he would stick with eight press conferences, Warsh said:

"When you hold a press conference, you need to have some important news to announce."

The Fed began moving toward transparency after a sharp rate hike in early 1994 shocked markets and led to Orange County, California's bankruptcy at the end of that year. It was the largest municipal bankruptcy in U.S. history at the time.

Coronado noted: "Such volatility is of no value to the economy." The Fed believed "clearly stating what you are doing and why" was a better approach.

Some experts believe that despite Warsh's criticism of the Q&A format, he may find it difficult to resist the opportunity to shape public perception of the Fed under his leadership. Matt Luzzetti, Chief U.S. Economist at Deutsche Bank, said he doubts Warsh will end the practice of holding a press conference after every meeting.

Luzzetti said in a note to clients:

"The press conference provides him with a powerful and frequent platform to imprint his personal stamp on the Fed's message and shape the narrative immediately after each policy decision. Abandoning this stage would be a missed opportunity."

At this week's meeting, the Fed is almost certain to make no adjustment to interest rates. With the ongoing war with Iran, the economic outlook remains highly uncertain, and with inflation now surging, the rate cuts expected later this year seem increasingly distant.

Reporters are likely to press Powell on whether he will remain on the Fed's Board of Governors after his term as chair ends on May 15.

U.S. Attorney Jeanine Pirro announced last Friday that she was ending her criminal investigation into Powell. Ian Katz, Managing Director at Capital Alpha, said it remains unclear whether this announcement will affect Powell's decision to stay on the Fed board.

Powell can continue serving as a governor until his term ends in January 2028.