Traders and investors trying to parse the statements coming from the world's most important central bank are at a loss: Will an interest-rate increase come in September? And will there be one, two or no hikes this year? Instead of clarity about the economic outlook, the Federal Reserve is delivering Kodak moments, highly staged events that seek to communicate control but which really suggest that form has replaced substance.
A photo taken at last week's Jackson Hole gathering of central bankers and economists shows Fed Chairwoman Janet Yellen flanked by New York Fed President William Dudley and Fed Vice Chairman Stanley Fischer. "I don't think we're propping up the chair," Fischer said in response to a question on Tuesday. But he said the photo "sent a message that people within the system are thinking along the same lines."
Peter Hooper, the chief U.S. economist at Deutsche Bank, noted on Monday that the photo appeared to be carefully orchestrated for effect. Is this what forward guidance has come to? Contriving photo opportunities to show harmony among policymakers?
If the Fed's objective last week was to put its September meeting back into play as the potential venue for a rate increase, it can claim a partial success. Prices in the futures market show traders now see about a 34 percent chance of a hike on Sept. 21, up from 22 percent two weeks ago. But you still have to go out to December before the likelihood rises above 50 percent.
There's a growing consensus that monetary policy is becoming impotent, and that governments need to step in with fiscal stimulus. "You can't expect us to do the whole job," Christopher Sims, a Nobel Prize-winning economist from Princeton University, said at Jackson Hole last week. "So long as the Legislature has no clue of its role in these problems, nothing is going to get done. Of course, convincing them that they have a role and there is something they should be doing, especially in the U.S., may be a major task."
Finance — particularly in an era of fractional reserve banking — is essentially a confidence trick. Central bankers aren't just economists and policymakers; they're also salespeople, selling a story.
So there's a bias for central banks to express complete confidence in the policies they pursue. Jeremy Stein, a former Fed governor and Harvard professor, says the U.S. central bank remains "keen to reassure we have got more tools as opposed to saying, 'Guys, we are kind of running low on ammunition here and the fiscal side needs to step up.' "
Gilbert is a Bloomberg View columnist and editorial board member.
