The constant chatter from Jerome Powell and the Federal Reserve is confusing the stock market and hurting the economy. It's time for them to shut up.
In an attempt to rein in too-hot inflation, the Fed has tried to signal to investors and the financial markets its plans for tackling rapid price growth. In order for monetary policy and interest-rate hikes to work, the markets have to clearly grasp the Fed's goals and fall in line with those objectives.
Other times, this signaling hasn't gone as well. When the Fed began hiking rates in 2004, private-sector debt costs actually got looser. From June 2004 to September 2005, both corporate bond yields and mortgage rates fell about half a percentage point while the Fed's main interest rate increased to 3.75% from 1%. The markets failed to get the picture, and as a result, the Fed's efforts to slow the economy and make the 2000s expansion more sustainable were a failure.
These flip-flops have caused chaos for markets. Stock prices plunged after the mid-June meeting but soared after the subsequent meeting seemed to signal that the most intense rate hikes were over. The yield difference between risky and low-risk bonds also collapsed. That sounds like good news, but it actually represents a breakdown in the way monetary policy is transmitted to the rest of the economy.
The good news is that the bond market is confident the FOMC will succeed in bringing down inflation, and surveys of consumers and businesses suggest inflation expectations have dropped with gas prices over the past few months. The Fed is credible in the long run, but the FOMC is making its own life much harder by changing its script.There is one clear lesson for the FOMC from this summer: Communications are not working correctly.