Federal Reserve Watch: Let’s Stop Talking

Jerome Powell, chairman of the Board of Governors of the Federal Reserve System, has tried to signal what the Fed is trying to do in terms of the future of monetary policy.

Mr. Powell is drawing back from this activity.

As Colby Smith writes in the Financial Times,

“Since the Federal Reserve in March embarked on what has become the fastest pace of interest rate rises since 1981, it has provided painstaking detail about its future plans to tighten monetary policy.”

The result…not good.

“By tipping their hand thus far, policymakers have tried to manage investor expectations and avoid bouts of extreme market volatility.”

“But the Fed has been burnt after giving a blow-by-blow account of its plans, only to then hurriedly change tack as inflation spiraled further out of control.”

Mr. Powell:

“It’s time to just go to a meeting-by-meeting basis and to not provide the kind of clear guidance that we had provided.”

About time.

When I was in the Fed, the “openness” policy was to stay out of the news just as much as you could.

In fact, the feeling was that if you were doing your job and doing it well, the Federal Reserve would never be mentioned in the press.

That is, the only time Federal Reserve actions would get into the newspapers and on the nightly news were the times when it was screwing up.

Mr. Powell has been “learning on the job.”

For most of the time Mr. Powell has been the Fed chair, he has pushed for openness, and, as a consequence, Federal Reserve monetary policy has become a part of the daily news “on the air” and in the newspapers.

The result?

Discussions all over the place about what the Fed is doing, what the Fed should do, and what the Fed did wrong, along with daily journalists’ efforts to report on what Mr. Powell is doing.

This is not the atmosphere that monetary policy should be operating within.

Unfortunately, even with Mr. Powell trying to pull back, given the time period we are going through and given the economic situation the U.S. finds itself in, it looks as if the press is going to keep the pressure on.

Where We Are

In terms of the actual conduct of monetary policy, the Federal Reserve is simply moving along the path that it is intending to follow.

First, when it comes to the Fed’s policy rate of interest.

The Fed is adhering to the schedule it originally laid out.

There have been four increases in the Fed’s policy rate of interest since the Fed began to move its targets on March 16, 2022. The last increase was, of course, this last Wednesday, when the Federal Open Market Committee raised the range for the policy rate of interest by 75 basis points.

The policy range for the Federal Funds rate is now 2.25 percent to 2.50 percent.

The question then becomes, what has the Federal Reserve done to support this rise in its policy rate of interest?

Well, the effective Federal Funds rate, historically, has been tied to the amount of “excess reserves” the commercial banks have on their balance sheet. As the amount of excess reserves goes up, the effective Federal Funds rate goes down. As the amount of excess reserves goes down, the effective Federal Funds rate goes up.

A “proxy” for excess reserves that appears on the Fed’s balance sheet, which can be obtained weekly from the Fed, is titled “Reserve Balances with Federal Reserve Banks.” This number can be found on the Fed’s H.4.1 statistical release “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.”

Since, March 16, 2022, the date the FOMC began to raise the Fed’s policy rate of interest, Reserve Balances with Federal Reserve Banks have declined by almost $620.0 billion.

This is a huge amount of money.

But, these reserve balances have declined in order to support the Fed’s efforts to raise the policy rate of interest.

So, the Fed has lived up to its statements and has supported the rise in its policy rate of interest. Simple enough.

The second part of the Fed’s program was to begin reducing the size of the central bank’s securities portfolio, that is, the securities it has purchased outright.

The Fed did not begin this move until June.

Since June 22, 2022, when the first declines began to show on the Federal Reserve’s balance sheet, the amount of securities held by the Fed has declined by $40.6 billion.

Remember, the process the Fed is using to reduce the size of the securities portfolio is one in which the Fed will allow securities to mature off its balance sheet, but will only replace part of them, consistent with the speed at which the Fed is managing the reduction.

Of this $40.6 billion decline, $29.1 billion of the reduction came in U.S. Treasury securities, and the other $11.5 came in mortgage-backed securities.

So. the process of reducing the size of the Fed’s portfolio of securities is underway.

And, this effort will increase in the size of the monthly reduction as time goes along. The program is expected to last into 2024 and will result in a total reduction in the portfolio of more than $2.0 trillion.

This is the second part of the Fed’s program.

Going Forward

So, the Fed has announced its plans and the Fed has now begun to execute the plan.

Where is all the press coverage and the controversy coming from?

In my view, all the press coverage and the controversy are coming from the efforts of Mr. Powell and other Fed officials to be open with the world and “discuss” how they are trying to handle the execution of the program.

Unfortunately, all the “discussion” comes from “interpretation.”

And, everyone has their own interpretation of the statistics and the narratives that are attached to the statistics.

We are operating in a world of radical uncertainty.

We don’t know all the possible outcomes that might take place in the future.

So, we speculate, we interpret, we talk, we dream.

But, unfortunately, in the case of executing monetary policy all the talk, all the speculation, and all the interpretation just lead to more and more uncertainty.

In my mind, Mr. Powell and other Federal Reserve officials need to pull back and not talk so much.

The Fed is acting.

We need to follow the data.

Let’s stop talking.