(Bloomberg) A market-soothing set of minutes to the Federal Reserve’s Dec. 18-19 policy meeting raised questions Wednesday over why investors didn’t get that same message three weeks ago.
Instead, the Fed signaled “some further gradual increases” in interest rates were on the way. Chairman Jerome Powell followed with a press conference that investors felt was overly dismissive of sharp price drops and volatility. Already down about 13 percent from the end of September, stocks skidded another 1.5 percent that day.
“He could have handled that differently, and better,” said Roberto Perli, a former Fed economist and partner at Cornerstone Macro LLC in Washington.
Powell did, Perli noted, say very early in his press conference that low inflation “gives the committee the ability to be patient in moving forward.” That’s pretty much the same message that he struck in Atlanta on Jan. 4, that other FOMC members have repeated in recent days, and which has helped lift the S&P 500 Index by about 10 percent from its Dec. 24 low.
Still, “he didn’t really beat it over and over like he should have,” said Perli. “When the market is on edge, it helps repeating things over and over.”
Another misstep in Perli’s mind: saying the balance sheet run-off was on “automatic pilot” was a note of stubbornness the market didn’t want to hear.
The policy statement, and the tone Powell set on Dec. 19, stand in particular contrast to a section in the minutes describing the committee’s outlook for monetary policy.
“Many participants expressed the view that, especially in an environment of muted inflation pressures, the committee could afford to be patient about further policy firming,” the minutes said. “A number of participants noted that, before making further changes to the stance of policy, it was important for the committee to assess factors,” such as how growing risks and past policy moves might affect the economy.
Not that Powell deserves all the blame. The Fed must be wary of appearing to respond too readily to a bout of market volatility with a policy shift. The chairman was also under pressure from President Donald Trump to stop raising rates. That pressure “may have been part of his reluctance to deliver too dovish a message too quickly,” Perli said.
But there may also be another explanation for the disconnect between the minutes and Powell’s Dec. 19 press conference, according to Vincent Reinhart, chief economist at Standish, part of BNY Mellon Investment Management.
Reinhart, a former director of the Fed’s division of monetary affairs, said Fed officials may have molded the minutes in a way that was designed to react to the market’s negative reaction.
“What I think happened is Jay Powell accurately conveyed the sense of the committee as he understood it in the opening statement and in the press conference, and it was not received particularly well,” he said. “After the fact, they emphasized, with more sensitivity, something that the chair regretted not having emphasized.”
The minutes, Reinhart said, are nothing like the full transcript of FOMC meetings that gets published five years later. “They have to be true,” he said about the minutes, but they can significantly alter the message that emerges through decisions on what gets included and what gets emphasized.
Lou Crandall, chief economist at Wrightson ICAP LLC, agreed.
“I have always been skeptical of the claim that these purely reflect the climate on the day,” he said of the minutes. “If I were Powell, I’d rather convey the message of patience and be accused of having been a little bit misleading on the day’’ of the meeting.