The Fed Has to Fix Its Communication Problem
The central bank’s messaging needs to focus more tightly on incoming data, not on plans and promises, and it can start by abandoning its “dot plot.”
Communication breakdown.
Photographer: Michael Nagle/Bloomberg
The Federal Reserve has begun one of its reviews of “monetary policy strategy, tools and communications.” This month’s cut in interest rates and investors’ reaction to it underline just why such a review is needed.
Consider how the latest policy announcement unfolded. It had three main parts. First, the Fed cut 25 basis points from the policy rate, bringing it down to a range of 4.25%-4.5%. Second, it said progress in curbing inflation was going more slowly than expected. Third, it projected fewer rate cuts next year than it did previously. Investors saw this combination as a “hawkish pivot” – meaning a tightening of policy despite the rate cut – and dumped shares.