Original author: Bao Yilong

Original source: Wall Street Watch

Internal communication strategies at the Federal Reserve have led to divergence, as Waller's "less talk" approach is met with resistance from his colleagues.

On October 27, "New Federal Reserve News" Nick Timiraos pointed out that Federal Reserve Chairman Waller's push for a new communication style of "silence is virtue" failed to persuade most of his colleagues, resulting in the committee conveying noisy and scattered signals to the outside, causing market expectations for an interest rate hike in October to plummet from 70% to 15% within just a month.

The article reported that between the end of the last policy meeting and the beginning of this week's silence period, 16 Federal Reserve officials with a full year in office made at least 59 speeches, interviews, and public statements, roughly comparable to about 54 during the same period a year ago.

This figure indicates that despite Waller intentionally limiting his own speech since taking office in May this year, other officials have filled the void, each articulating their views.

The direct consequence of the aforementioned divergence has been clearly reflected in the market. After the Federal Reserve raised interest rates last month, the market inferred a higher likelihood of consecutive rate hikes from Waller's press conference remarks; subsequently, the two vice chairs expressed that they were not in a hurry to take action, leading to a significant decrease in the probability of an October rate hike.

Kathy Bostjancic, Chief Economist at Nationwide Mutual Insurance Company, stated:

If Waller doesn't speak, others will fill the void.

Communication Route Dispute: Whether to Inform the Market of the "Reaction Function"

The essence of this debate is not whether to restore a commitment-style forward guidance—almost no officials want to return to the practices before 2021, when overly clear interest rate commitments were seen as delaying the Federal Reserve's response to inflation.

The article points out that the core dispute lies in whether officials should still explain to the public how they will respond to changes in the economy.

Waller's position is clear. He believes that continuously narrating policy outlooks will lock officials into their own predictions while obfuscating signals that the market can reflect back to the Federal Reserve. He stated in Bangkok this month:

I do not intend to say what I might do at the remaining meetings this year; this is a new chapter for the Federal Reserve, and we are no longer doing that.

Richmond Fed President Tom Barkin, who supports this position, also told reporters that he "is very pleased that this seems to be becoming institutional practice." Barkin consistently discusses economic conditions but almost never comments on specific meetings.

Opposing Voices: Not Explaining the Framework Will Only "Create Noise"

However, multiple officials have publicly defended more robust communication.

Cleveland Fed President Beth Hammack pointed out in a speech this month, that if households or businesses "borrow under incorrect judgments about policy direction, the costs can be very high."

In an interview, she emphasized that clarifying her own thinking framework does not equate to making a commitment:

What they hear is not a commitment, because I am not making a commitment; I am explaining a framework.

St. Louis Fed President Alberto Musalem directly rebutted the logic that "less talk can allow the market to focus on data" in a speech in London, stating that a central bank that keeps its own framework under wraps "cannot allow the market to focus on data; speculation will only create noise."

He added:

The choice facing central banks is not to choose between noisy overcommitments and silence, but between allowing the public to guess for themselves and proactively informing them.

Hammack and Musalem both took their current positions in 2024, both come from a financial background, and have consistently been representative voices advocating for further rate hikes this year.

"Experiment" Faces Reality Check, Former Official Issues Warning

This communication experiment quickly faced stress testing after last month's rate hike.

Nick Timiraos pointed out that the market inferred a high probability of an October consecutive rate hike from Waller's remarks and economic data; subsequently, the vice chairs spoke up to correct, suggesting they were not in a hurry to act again, and market expectations promptly reversed.

Federal Reserve Governor Christopher Waller described this incident as highlighting the limitations of significantly compressing forward guidance, likening it to "throwing out the baby with the bathwater." He stated plainly:

I cannot think of anything that happened that week that resembles forward guidance more.

Former Federal Reserve Vice Chairman Donald Kohn indicated that before sending such a significant signal to the market, he would have previously shared his speech content with then-chairmen Greenspan or Bernanke to seek their opinions.

He stated that neither ever expressed disagreement. Kohn said:

Current events indicate that at least some committee members are uneasy about such a lack of forward guidance because the market is moving in the direction that the committee wishes to guide.

Lack of Consensus Among the Committee, Disorder May Continue

This situation is further complicated by the fact that current officials not only have differing judgments regarding economic conditions but also have failed to form a unified narrative on the policy path.

The article notes that some officials believe monetary policy is clearly too loose; others view this round of rate hikes more as an insurance response to the risk of long-standing high inflation embedding price expectations.

UBS Chief U.S. Economist Jonathan Pingle stated that under normal circumstances, the chair's statements can provide a common language that other officials can reference, and "being able to speak on behalf of the committee brings some coherence, which I believe is precisely what is currently lacking."

Former Federal Reserve economist Claudia Sahm summarized the current situation as "one of the worst among all possible outcomes." She said:

No one can force him to speak for the committee, and frankly, he cannot force other committee members to be quiet.

Currently, a working group composed of external experts is drafting recommendations regarding the Federal Reserve's communication methods, expected to be submitted by the end of the year. Waller indicated that any adjustments must be decided by the entire committee.

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