Federal Open Mouth Committee

The Federal Reserve’s shift from famously opaque to ultra-transparent over many decades has been remarkable. For its first 75 years, it communicated policy decisions through its open market transactions, leaving the marketplace to infer when a target change had occurred. Chair Alan Greenspan cracked open the doors to the public in the early '90s by adding a brief statement released after each Federal Open Market Committee (FOMC) meeting. Then Ben Bernanke flung the doors wide open, asserting that communication increased the effectiveness of monetary policy. Under Bernanke, Janet Yellen and now Jerome Powell, the Fed post-meeting statement has ballooned to an essay, the oft-cited “dot plot” provides more detailed projections, the FOMC minutes are released sooner, the Fed Chair holds press conferences after meetings, and speeches and media appearances by the other members occur frequently. The Federal Open Mouth Committee is a better name.

The question now is how effective this openness will be in engineering the hoped-for soft landing—returning inflation to the target rate without causing a recession. The fixed-income markets suggest the open mouth policy could be quite effective. Bonds, swaps and futures levels have reacted to the slew of communications by pricing in expectations of significant Fed action. All U.S. Treasury yields have risen rapidly this year, particularly the most policy-sensitive 2-year note yield, which has risen almost two percentage points since the end of 2021! Powell’s FOMC has persuaded the market to do much of its tightening work for it without having moved policy rates much at all. Among many examples, the 30-year fixed-mortgage rate has risen to above 5%, up from around 3% at the end of 2021, even though the Fed has only increased the federal funds target range by 0.25%.

Amid all the messaging, the implied terminal rate is currently about 3.3%, potentially reached in August 2023. We think it ultimately could exceed that level as inflation may have peaked but might not decline rapidly enough for the Fed’s liking. Only time and more inflation data will tell. The markets have come to expect 50 basis-point hikes at next week’s FOMC meeting and at subsequent ones. Some say “talk is cheap,” but Fedspeak is doing the job of driving bond yields and borrowing costs quite well.