There is a something of a tradition at the Federal Reserve of rookie Chairmen causing themselves problems early in their terms, or in their first press conferences.
It’s a rare event that begs for a live feed and strong preparation. On Wednesday, the market isn’t sure what to expect and that’s why the US dollar has been so quiet this week.
There is a near certainty he will be pressed about +4% inflation and that could easily lead to him sounding overly hawkish and causing a dollar rally. In contrast, the market doesn’t think he will continue to the arch-dove he was during confirmation, but if he talks about rate cuts, that might need to be repriced. Furthermore, the Chair’s job at the press conference is to speak for the whole of the FOMC, so the market could have a hard time telling the difference between Warsh’s opinions and the Committee’s.
Here are some early stumbles from other Fed Chairs:
Yellen
In March 2014, Yellen committed the textbook version at her first press conference. Asked to define how long “considerable period” meant between ending QE and the first hike, she said it probably means something on the order of around six months or that type of thing — more hawkish than the market expected, and both stock and bond markets sold off.
Bernanke
Another famous early-term incident was Ben Bernanke about two months into his term. where he testified before the Joint Economic Committee of Congress. He noted that the Fed might choose to pause its two-year-long rate-hiking campaign “at some point”. That led to a six-year high in stock markets and he was taken as a dove. Then that weekend, at the White House Correspondents’ Association dinner, he chatted casually with CNBC’s Maria Bartiromo and told her the markets and media had it wrong: he wasn’t signaling he was finished, and it bothered him that people were reading him as dovish and she reported it that Monday afternoon on the air, leading to a selloff. He later called it a lapse of judgement to be speaking to the press about rates.
Powell
It was a longer wait for a mistake from Powell as it didn’t come until the Autumn but in an October interview with PBS’s Judy Woodruff, Powell said the Fed was “a long way from neutral at this point, probably” and might “go past neutral.” Markets read it as a green light for a long runway of further hikes, and it lit the fuse on the Q4 2018 selloff. In short order, the 10-year Treasury yield jumped from 3.06% to 3.23% by that Friday, while the Dow and S&P 500 fell 1.8% and Nasdaq fell 3.3% from Wednesday intraday highs to Friday’s close
Just six weeks later, at the Economic Club of New York, he softened it, calling rates “just below” the neutral range.
He made a second mistake later that year at the December FOMC press conference. He was asked whether the Fed would reconsider shrinking its balance sheet. He insisted the runoff would continue on “autopilot,” telegraphing that quantitative tightening wasn’t up for negotiation. Stocks tumbled during the press conference and kept falling into Christmas Eve — the worst December for U.S. equities since the Great Depression.
On January 4, he went into full reverse at the American Economic Association meeting in Atlanta. He reassured investors the Fed would be flexible with all its policy tools, said there was no preset path and the Fed could be patient on rates, and crucially that he wouldn’t hesitate to change the pace of balance sheet reduction if needed.
The lesson
The lesson from all three — and Lagarde’s famous “I’m not here to close spreads” is that markets are apt to take small signals or modest messages and extrapolate big moves. I wouldn’t expect it to be any different with Warsh
