33: How ``Fed Watching'' Became a Thing

You know, It's like the Super Bowl twelve times a year. It's my favorite day. But in terms of excitement, the next closest day for me has to be obviously the eight times a year that the FED meets and decides what it's gonna do with monetary policy. And we're recording this on UM. Today is June fifteenth, so it's a Federal Reserved day. We were or to get before the decision, so we don't know what's gonna come after, but today we're going to talk about Federal Reserve and monetary policy.

A book from a slightly broader perspective, right, so you know what happens on FED days, Right, Everyone goes kind of nuts. We have all the economists piling in making their predictions and then analyzing what actually happens. We have investors who are potentially repositioning their portfolios, analysts, the media. It's all anyone can ever talk about. But was this always the case, or was this degree of FED watching? You know, something relatively new that happened only in the

past few years. We are going to speak with one of our all time favorite FED watchers to discuss We are here with Tim Dewey. He's professor at the University of Oregon, writes a fantastic blog basically devoted to watching the FED, and Tim is in studio with us. So welcome Tim, doing well, Thank you very much for having me today. It's a great day in New York and

I have been having a great time. Thank you. So let's talk about the beginning right now, or let's take it from the beginning, because we know that FED Day is this huge, essentially market holiday, and there's everyone tries to pick a part the FED statement and look at every word and try to figure out what it means and the dots in the press conference. But was it always like that? It has become more involved over time.

I started doing this back in the late ninety nineties, and at that point in time, it was it was still a big deal, but it wasn't the circus that is today, especially because we didn't have statements that were usually as as extensive, we didn't have a press conference to work with h And I think that over the period that I've been looking at it, well, another issue is that the monetary policy has become such a more

important part of the economy. As we've transitioned away from, you know, less and less using fiscal policy as a as a stabilization tool, a lot of more emphasis has been put on the federals serve as as a stabilizer for for economic activity. So over that period of time, I think definitely, yes, we have seen much much more interest in the subject. And was there a moment where you kind of realized to yourself that fed watching had

become a thing? Uh? Maybe when I started doing it as a job, was the was the time I thought it became a thing? You know? Uh? Again, because I've been doing it for for quite a while, I've been able to see it build and evolve over time, And so for me, there was no one sharp break that it became much more interesting. Although I would say that during the financial crisis, uh, it certainly rose in prominent. It's a great deal because it wasn't then just about

interest rates. That's when you went down the road of the alphabet soup of of lending facilities to help ease the financial crisis, for example, you went down the realm of quantitative easing. Uh So, so the nature of the game did change, I think dramatically at that point. Became somewhat more complex too, and you did more direct forward

guidance uh to the markets. And so sometime within the last since the financial crisis, I do think there has been a market increase in the attention that we give to the Federal Reserve, and and a lot of that's just due to the broader scope of the activities that it's engaged in. So let's get down to specifics you mentioned. Uh. You know, the actual Fed statements are longer today than they used to be. There's more words in them. Then

they're all these following things. When you first started off, obviously there weren't press conferences. What do you see as having been the most significant changes to the job of watching the Fed over the time, and what do you make of those changes? Have they been for the better or worse? Generally? I think they've been for the better,

a couple of big changes. When I started doing this, Alan Greenspan was was the chair, and it was I felt that was a very different environment in a number of respects, one of which is I thought really had to pay much more attention to the governors which were speaking more frequently. Plus you had to recognize that that Alan Greenspan was having a very large driving influence on the direction of policy. So in some sense that made

made a little bit easier. I know that there's this view that Alan Greenspan is fairly opaque to understand, but it made it easier in the fact in the in the idea that you only had one person you had to understand UH. And so so that was something we lived with for quite a while. And that's something that I think has changed quite dramatically since the bernanke fed UH and the Yelling fed is that we do have a lot more speaking on the part of the president's UH.

There seems to be a lot more influence from some presidents than that maybe I had since in the past. UH. And you know, Another issue is that we don't have as many governors talking as as part of that because we haven't had as many governors has been understaff for for for quite some time, we don't seem to have the the the governor speaking as much as they used to about policy, and that I think is something that

is um that's something that's lost. I very much value that that core of the committee coming public on a frequent basis with their views as a guiding direction for the for for policy. And so what to what do you attribute that flip? So, just for those who aren't familiar with that, the presidents are the presidents of the regional federal reserve banks. The governors are in d C. And you said it used to be the governors talked more. Now we hear a lot more from the president. When

did that change? And why is that? It seemed that it changed? For me, what I started to recognize it was sometime between that transition between the Greenspans FED and the Bernankee FED, where I thought that really that the voice from from the um the governors was becoming much

much more distant. And why did that happen? I think that the governors now do not necessarily view that as as important part of their job as maybe the governors did in the past, that that public outreach aspect of it is something in some sense they seem to be leaving to many of the FED presidents rather than taking them on on themselves. It might also be because they don't want to seem as to be guiding policy, as you know, in the open as much as maybe they

are in the background. So it sounds like you have this cacophony of FED voices. Now you also have a sort of a balance of power lacking in the form of the governors. You have all these new monetary stimulus measures that were announced since the crisis. F MC statements are getting long or does that make the job of FED watching more difficult? And what can you do to try to cut through all that noise nowadays? I do

think it makes the job more difficult. Like I said earlier, when we just had Alan Greenspan to worry about, that made it I think much easier. But now you really do have to look at each speech, look at each president and see if they are making statements that are reasonably consistent with the rest of the group, and if they're not reasonably consistent. You have to then decide is this something we should just throw out or is this something that's going to be a you know, the way

of the future, a change in policy. And it takes a lot of work to go through these speeches on a regular basis and understand where everybody is positioned. And that's you know, I think an increasingly large challenge for for for FED watching in general, and may involve that may reflect some of the confusion that that market participants seem to have about what is the FED really think?

What is the Fed's fundamental reaction function? Because we're having a hard time piecing it together from all the individual talks, right, I mean, that's sort of like this big picture question because obviously the FED communicates in all these new ways.

So there's a press conference and there wasn't one before, and there's the dot plot and that's an innovation, and um, then there's all this talk, but it still doesn't feel as though the market or anybody really knows what the FED cares about, what its target, what what as as people put it, its reaction function. So does that mean that it's not accomplishing all this extra communication, that it's

not accomplishing what it's supposed to. I think Joe is trying to ask nicely, if you think the FEDS communication is effective? No, that's right, Um, I think it's or counter effective and like that, not just not effective, but that all all these things explicitly designed to prove clear they are having the opposite effect. Well, that's the problem is the more you try to clarify what you don't know, the more it's revealed that you don't really know what

the future is. And they think that's what we've been falling into is these intense efforts of clarification, really, um, are revealing that the FED doesn't have as much better idea about the future as any of us. And I like to think that creates a more real environment in some sense where we recognize that what what what the FED things are going to do and what they actually do are very different things because they don't really know

what the economy is going to do. And it's very difficult to uh in that environment when they're actually being much more open about that, to say, Okay, here's what they said. Why aren't they doing what they said? Well, you really have to go backwards and say what's going on? In the in the economy that that pulls it together. So um has this made it less effective of a

communication strategy? It depends what their ultimate goal is. Right, If the ultimate goal of the communication strategy was to make it clear where interest rates are going to be, it's not particularly effective because they can't know it that in advance, and efforts to try to pretend like they

know it in advance have not been very effective. And so that's where I think the communication strategy really kinds of falls apart, is when they started insinuate that they have a very good idea of where interest rates are going to be and and they can't get there. But and so another possible goal are actually arguably the real goal of the FED is to have full employment and

stable prices. And so sure, sometimes market participants might complain it's like, oh, we don't know what the FED is gonna do, but perhaps that shouldn't be the measure by which we judge the FED, and we should measure them. And you know, unemployment rate has come down a lot since the financial crisis, and arguably inflate prices have been quite stable, so judged by those metrics, maybe it's all working. That's that's I think an excellent point is what do

we expect the Federal Reserve to do? Well? It's not necessary to hold our hands through every FED meeting. We expect the Federal Reserve to deliver on its mandates of stable prices and full employment. And the extent that we're moving in that direction, UM quite well in many metrics, by many metrics. Is it really a siinus success for the institution? And the fact that maybe we don't always get what the next interest rate UM call is going

to be, we don't always get that right. That's not necessarily a problem for the FED UM or for the economy as a whole. It's certainly a problem for you know, maybe market participants that that that have to worry about that, But that's not what we should be caring about as an eventual outcome of the FED tim We haven't actually talked about this much. But you are based in Oregon, whereas the vast majority of FED watchers are usually on the East coast. Um does that influence the way you

work at all or how you analyze the Central Bank? Well? I think it has to two advantages. One is most of the news or a lot of news will come out at eight thirty in the morning when these data points are released, and maybe I'm just rolling out of bed at that point because it's five thirty on the West coast. UH. And the advantage there is that I'm

not forced to be instant pundent quite as much. I get to digest maybe the information for a little bit longer before I'm able to comment or think about it. Another advantage is being outside the fray a little bit where I can take maybe a different perspective than UH.

Then I'm not getting this sort of I'm not fed with the chatter, constant chatter in the background that might be influencing the way we sort of turned into group think, right, we start to develop a group thank if we're all talking about the same thing a lot, and I get pulled away from that because I'm as um engaged or exposed to you know that that that aspect of the job.

So I think those are two advantages that the disadvantages just being a little bit further away from from the from the action, UH and not having quite as much of that um constant dated day UH chatter in the background. Here's another question, Tracy, and I as anyone who's listened to this podcast for a long time. Have a real soft spot for bloggers, uh and people who have made

a name for themselves in a different route. I started following you because of your blog and you know, this um resource that exists outside of most media institutions that produced is such a top knowledge work. How significant has that been for you in your career? Uh, to have built this outlet that people come to and you know, in terms of making a name for yourself. For me, it's been very significant. I was very very lucky to be able to really re engage in this this policy

debate after moving back to Oregon. I think we've been very very difficult to to end up back in this position had I not had the outlet of the blog. And for that I think, uh, you know my fellow blogger Mark Toma for starting his Economist Few blog and me being able to write on that. So I have

a question. The more we talk about FED watching, the more I kind of get this vision of a bunch of economists with binoculars like looking at the Central Bank, like the way bird watchers kind of look at birds. What's been the most exciting bit of FED watching? What was the most exciting day for you. You've done this for many, many years now, there has to be one

that kind of sticks out in your mind. Wow, there's so many that stick out over the years, like then the the financial crisis, there are so many days in there where we just had no idea what the FED was going to do next. UM And and so that was the was certainly a very exciting part point of time. UM last last fall when Governor Lyle Brainerd started coming on the scene much more aggressively worrying about the international aspects.

Though it was a very exciting time for me in recent history of just something very different going on at the FED that people weren't paying attention to. Uh So, so in recent history that's that UM. In in past history or in in during the financial crisis, there are so many days of you know, we're going to cut rates fifty basis points out of nowhere that really resonate

UM in my mind. So it's a hard question for me, Tracy, because there's so many of these things that that really stick in my memory now as being really prominent days. And I don't want to say my life, but let's bring it forward to the current era of sort of the FED and central banking. I feel we're at this point. I mean, people have been critical of world central banks quite a bit since the financial crisis, but of late, we're seeing negative interest rates the sort of novel policy tool,

more and more central banks around the world. We're seeing more and more people call for the FED to assume a quasi fiscal role. Uh, whether it's explicitly funding monetization of government spending. It feels like we're at sort of this crossroads, or are at this point where people are questioning whether the traditional tools as we knew them of central banks are up to the task. How do you

feel about some of these big debates? It does do central banks need to rethink their role in the world economy and what they can do in order to help the economy grow faster and have stable prices and all that. Right, central banks are already really engaged in that process because it's not about just interest rates anymore. For so many years, it was just basis points up, basis points down, something like that that was really guiding the general direction of

financial markets and economies. Uh, we don't have that world anymore, right, So many countries are economies are nearer at the zero bound or below it that they do have to be engaged in different ways of thinking. And that's where we saw what where quantitative easing came from. For example, UH that we see in in in a number of central banks. We see very aggressive actions on the Bank of Japan UH.

And one interesting, one interesting thing though, is that certainly maybe some of these which we have thought in the past would have been just crazy, you know, super aggressive policies have not always yielded quite the aggressive impacts that we would have thought, and that I think is showing you something about the limits of monetary policy. I know there's essentially two camps on this. One is that monetary

policy just needs to get easier, right. We we need to push in the negative rates more deeply, we need more quantitative ease, and we need better forward guidance, and that's really the key. But the other camp I think is is realistic here and that there's there's a real need for fiscal policy that is more coordinated with the

monetary policy. Right, it's ten and you still have persistent shortfalls of inflation targets pretty much everywhere in the world, despite the fact that you know, we've had this QUEUEI and all in several places tools which at the time they were announced seemed very radical and people thought it would be dramatic. So where do you fall on this? Do you think that the industry, I guess really doesn't require a rethink about how powerful it is, how powerful

it's tools can be. I think that that's correct. It does have to rethink that, and I think it has rethought that. Um And you see central bankers oftentimes saying we could really use some more help from fiscal policy. We certainly saw that during the during the recession, were then UH chair Bernankey would would would say, you know, we could do some more help care And would that have been unthinkable in say the late nineties for UH for a major central banker to say, oh, we need

more yea. So so I think that in late at that period of time, they would have been much more confident of their ability to guide the economy into a stable, equaliber in path essentially, and they should then leave fiscal policy to do a fiscal policymakers are supposed to do, which is considered decide what the size of the government is going to be, right, essentially, And that was a fairly easy distinction to make when you're operating, you know,

an an acceptable um level of output for the economy. Now, I think it's much harder to make that case, and it's only gonna be harder to make that case if we go into this next recession with interest rates close to zero already. Then we're going to be pushed right back into a realm of of quantity using very quickly. And I think there's going to be quite a bit

of discomfort around that. Congress was never really thrilled about the policy to begin with UH, and so you know, I think you know we're in a zone two were simple Bankers are very cautious about being too much of fiscal policymakers, and they'd really like that job to be taken back over by UM the fiscal side of the equation, But fiscal policymakers have been hesitant to do so because quite frankly, you need to rethink about how damaging debt

and deficits are, and that's really holding back some of this debate. I don't want to leave our listeners thinking about the impotence of central bank policies and the debt overhang and all these quite sad and intractable problems facing our financial system. So Tim, maybe just to finish off, what are your best tips for people who are watching the FED or who want to improve their FED watching?

Gay aim so to speak? So the best tips? Um, I think the most important thing is to remember that it's not about what you would do as a policymaker. It's about what the FED is going to do. So you have to remove your own personal biases from your analysis and your research. You really have to think about wealth. I'm Janet Yellen, I'm Lyle Brainer, I'm you know, a FED president. How am I going to react to this data?

Uh not how myself would react to this data or what you know, why I think inflation should be or should not be. So I think that's the number one UM trap that people fall into when they're doing FED watching is they start to think the FED should do what they think they should do, and that's not that's not going to be a productive UM avenue at all,

uh to to work with. So I think that's important. UM. Then the next thing is is along those lines, pay attention to what they say and how they read the data, and again try to say that they're reading it wrong or right. UM. When it comes to making that final final decision about where you think they're going to be headed. Uh. And so so those are the the the best tips that I can give as far as really what makes

I think a successful FED watcher. All right, Well, on that note, Um, you know, thank you very much for joining us and telling us about the history of your profession. And I don't think that the FED uh is going to become any less important anytime soon. I think FED days are gonna be huge days for as long as we can imagine, and so this will be This is a very useful stuff to keep in mind. There's definite job security here, all right, Thank you very much, Tim

doy the University of Oregon. That well, Tracy, I I feel like I'm going to go back and listen to this episode several times in the future because it just seems this the FED is going to continue to play such a central role in the economy and market that understanding all this stuff is not going to go out of stuff. No, I think that's one thing we can

say for sure. Um. The thing that struck me the most was that, even for a seasoned central bank watcher like Tim, is the idea that we really are in kind of uncharted territory, getting close to negative rates, lots of talk about physical stimulus. No one really knows what's going to happen in a few months time, a few years time, so it seems like it could once again be very exciting days for FED watchers. I agree. And then on that note, thanks everyone for listening to the

Odd Lots podcast. I'm Joe Wisenthal. You can follow me on Twitter at the Stalwart, and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. And also you can follow our guest Tim Deey on Twitter at Tim dot and you can find his stuff on Bloomberg dot com and on his blog, Tim Dowey's fed Walk. Thank you