By Mohamed A.
El-ErianUsing words to influence peoples behavior technically known as policy guidance is key to Federal Reserves ability to deliver on its dual mandate of maximum employment and stable prices.
Yet effectiveness of central banks communications strategy has taken a hit in last few weeks.
Chair Jerome Powell has a golden opportunity on Friday to advance process of regaining narrative.Its not that Fed pronouncements matter less these days.
They remain as important and influential.
What has changed is their impact on volatility.
Rather than help counter and contain unsettling market moves, many now worry Fed has been fueling them and, with that, inadvertently contributing to a market selloff that could undermine economic growth and longer-term financial stability.There is a long list of people second-guessing Feds policy approach, and not just any people: from president of United States to influential market participants, including top hedge fund managers.
The central banks communication efforts have also suffered.
As an example, shortly after Federal Open Market Committee policy meeting in December, New York Fed President John Williams had to clarify what Powell had stated at a news conference just two days earlier.When he speaks at annual meeting of American Economic Association on Friday, Powell has an opportunity to advance process of regaining more control over Feds narrative.
To do so, he could consider a three-point message to markets and politicians.First, that United States economy remains solid, underpinned by strong job creation and wage growth, which should be confirmed by monthly jobs report for December that will be released before his panel appearance; but balance of risk has undoubtedly shifted more to downside, as weaker-than-anticipated ISM numbers on Thursday made clear.
Second, that Fed is sensitive to possibility of spillovers from volatile markets contaminating health of United States economy, and to potential spillbacks from economic weakness internationally.
Third, that all of Feds policy tools are on table, including possibility of taking its balance-sheet reduction off autopilot.When your words are meant to be influential, and when they are an integral part of your brand, there are few things worse than losing control of your narrative.
Through appropriately crafted messages in these three areas, Fed has an opportunity to address this problem.Success would be part of a process, not instantaneous.
It wont alter what I and others have been warning is almost inevitable bigger reality of central banks having gone from repressors of volatility to contributors.
Nor will it change other inconvenient reality for central banks that they find themselves in this position largely due to factors beyond their control.
But success would help reduce risk of a policy mistake, especially one that could be forced on Fed by words and actions of others.