The Fed is at risk of facing a process of discredit that is not healthy for the markets or the world economy. The current financial volatility is explained, in part, precisely by the uncertainty surrounding the Fed.
And this situation is not free, in retrospectthe Fed has made communication errors that have reduced its credibilityan essential asset for any central bank, especially the most influential in the world.
The possibility of raising interest rates again in the short term is supported by the figures showing the United States economy, but a volatile Fed is not exactly the best way to give certainty to the markets.
Media offensive that does not help
In recent weeks, the Fed has deepened a media offensive that has only increased uncertainty, judging by the performance of the markets.
From the position of the need for new increases in interest rates to send additional signals to the markets, to the possibility of a rate cut in the first quarter of next year, The truth is that the Fed does not find a single discourse, a uniform discourse that allows it to communicate to the market.
If there is any doubt about this, we can only record some of what has been pointed out in recent days by some members of the Fed.
Susan Collins, president of the Dallas Fed and non-voting member this year, assured that inflation will be controlled without a large increase in unemployment; that is, it favors a “soft landing.” However, she believes that victory cannot yet be declared and, therefore, she expects interest rates to remain high for longer.
In contrast, Neel Kashkari, president of the Minneapolis Fed, who has a vote this year, said that consumer spending exceeds expectations and that inflation has not been successfully controlled, suggesting further increases.
But if you want an even more uncertain statement from a Fed member, please read the following:
Mary Daly, president of the San Francisco Fed, who does not have a vote this year, He pointed out that they do not know whether to maintain or raise the interest rate more than what is now found.
While Michelle Bowman, governor of the Fed, flatly believes that the interest rate should rise more because control over inflation will be slow, and that factors such as energy prices could alter its trajectory again.
Thus, without a solid and unified discourse, the chaos reflected by the Fed also has repercussions on the markets. Its credibility must and has to be restored because, otherwise, the vulnerability in the US economy will be greater.
The history of the Fed’s blunders goes back a few years before, when unexpected phenomena began to occur in the markets, and everything indicates that they were also caused by the Fed itself.
The Fed’s mistakes, in retrospect
– March 2020: Fed Chairman Jerome Powell stated that “Inflation will not be a problem“. The rise in prices began and today in retrospect the warnings that were made to the president of the Fed take on greater dimension, and his refusal to recognize the problem even minimized it.
– January 2021: The head of the Fed changed his tone, saying that “Inflation is temporary“. In a phrase that will be historic, the head of the Fed defined the rise in inflation in the US market and around the world as temporary. His words and this definition would end up marking him in his management that has not yet concluded.
– September 2021: Powell promised that “interest rates will not rise until 2024“. He denied that an escalation in interest rates could begin to control inflation; another unfortunate statement that will haunt him for life, because that’s exactly what happened almost immediately, interest rates began to rise.
– January 2022: Surprisingly, Powell stated that “Recession is needed to reduce inflation“. A speech totally contrary to everything he had said before, since to generate a recession it is necessary to increase interest rates significantly. The markets began to consider that the central banker was too unstable in his statements, and who knows if in his actions.
– December 2022: He assured that “Disinflation has begun“. What was interpreted by the markets as a sign of triumph over inflation, nothing could be further from the truth.
– February 2023: Powell offered an optimistic outlook: “A soft landing is possible.” Something that is feasible today, but without forgetting that the cost could be too high, with high interest rates for a long period.
– March 2023: He highlighted that “The banking system is stable“. Just a few weeks later the US banking system was shaken by the bankruptcy of several regional banks; The crisis was contained, but the impression was left that something is not right at the Fed by making statements that are not solid in terms of knowledge of something as relevant as the country’s banking system.
– September 2023: He predicted that “Inflation will not reach 2% until 2025“. A statement already totally opposite to the one he made minimizing the rise in inflation or the one he said was transitory. In fact, what we saw was chaos caused by inflation and poor management of the problem.
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