quinta-feira, 17 de setembro de 2015
Guessing games have added to volatility
The Federal Reserve’s decision to keep interest rates on hold brings some much-needed release to the pent-up uncertainty in financial markets. It is also the right choice: the US economy is still far from building up sustained growth momentum, and inflationary pressures are more remote than in June. But if the past few months have shown anything, it is that the uncertainty around the Fed’s decision matters in its own right, beyond the exact rate the policymakers plump for.
The guessing games around what the Fed’s open market committee, and chair Janet Yellen in particular, would do, have contributed to volatility and amplified other disturbances in financial markets, above all the Chinese stock market collapse and exchange rate policy changes. The FOMC’s big task now, as it continues to calibrate the optimal timing for an eventual rate rise, is to manage that nervous anticipation better than it did in the months leading up to Thursday’s decision.
The Fed’s opaqueness — market observers saw the decision as a toss-up until shortly before this week’s meeting — was in some measure unavoidable. Ms Yellen and her committee have emphasised that they will be guided by evolving data. And the data have not necessarily evolved to the advantage of clarity. With the world as uncertain as it is, it was natural that markets found it hard to predict what Ms Yellen might do — she may well not have known herself until it was time to decide.
But avoidable errors made the uncertainty worse. In earlier remarks, Ms Yellen had unwisely tied herself to the calendar by suggesting a rate rise “later this year”. That, of course, was always hostage to fortune: you cannot be both fully data-dependent and time-dependent, because data may not move to the timing you expect. When that happens — as it has — something has to give, and your credibility suffers as a result. That is why when the Bank of England formally introduced guidance to markets as a policy tool, it explicitly forswore what in the jargon is called “time-contingent guidance”, opting for “state-contingent” guidance instead.
Another problem has been that, despite Ms Yellen’s deep appreciation of how the Fed’s communication is itself a policy tool, markets have not understood well the data conditions that would make the FOMC make one or another choice. The “reaction function”, as the term of art goes, is unclear. With the September 17 decision out of the way, Ms Yellen and her colleagues have an opportunity to ameliorate this problem.
The decision itself helps clear up some of the uncertainty. We can now put more weight on international developments and market inflation forecasts in guessing how the Fed will act. Had it raised the rate, we would instead have shifted our attention more to domestic factors and the low unemployment rate. The update of the FOMC’s own forecasts corroborates a more dovish reaction function than we could previously have attributed to the Fed with confidence. So, too, does Ms Yellen’s press conference, in which she affirmed that the 2 per cent inflation rate is a target (read: average target), not a ceiling.
All this is doubly good: because it shows a Fed more likely to do the right thing — but also just because it makes it clearer how the Fed will behave.
Ms Yellen and her colleagues must now reinforce this improvement. FOMC members and Ms Yellen herself could usefully spend the next few months outlining their personal reaction functions better, pinning down in more detail how the data would have to change for them to vote for a rate rise — or indeed for a cut into negative territory, as one FOMC member now believes appropriate.
In uncertain times, state-contingent policy guidance remains the right approach for central banks. But how and on what states policy will depend is something interest rate setters should explain in more detail and on an ongoing basis. That should help both them and us manage the unavoidable uncertainty better.