[The Editors' Verdict] Do Not Fight the FOMC Statement

It has been less than 30 years since central banks began publicly disclosing the background behind their monetary policy decisions. Montagu Norman, who served as Governor of the Bank of England in the 1920s and 1930s, famously said, "Never explain, never apologize," and Ben Bernanke, former Chairman of the U.S. Federal Reserve (Fed) and Nobel laureate last year, revealed that "central banks generally believed that preserving mystique, regardless of policy flexibility, maximized market impact." Not disclosing policy decisions was a conventional wisdom among central banks in the last century.

The change emerged after the 1990s. In particular, the Fed, known as the central bank of central banks worldwide, led this transformation. Alan Greenspan, former Fed Chairman, is regarded as a key figure who greatly contributed to central bank policy transparency. In February 1994, Greenspan drew attention by directly announcing a rate hike after the Federal Open Market Committee (FOMC) meeting, and in August of the same year, he provided what we now call ‘forward guidance’?a statement summarizing the meeting results.

Notably, Greenspan’s statement at the time included the phrase, "At least one such action is expected to be sufficient," signaling a groundbreaking indication that no further rate hikes would follow. Since 2000, word choices in statements have attracted attention. When the economy was weak, statements expressed that "risks are shifting toward conditions that could amplify economic weakness," and when overheating was a concern, explanations noted that "risks are moving toward increasing inflationary pressures" (Ben Bernanke, ‘21st Century Monetary Policy’).

The Fed’s statements from 2004 to 2006 are credited with playing a significant role in fostering market confidence and stability. At that time, strong growth and falling unemployment made tightening inevitable. In June 2004, the Fed sent a message that it would raise rates "at a measured pace," meaning it would not increase rates by more than 0.25 percentage points at once. Subsequently, the FOMC met 17 times over two years. The benchmark interest rate ultimately rose to 5.25%, but unemployment never exceeded 5%. Consistent messaging helped facilitate a soft landing for the economy.

On the other hand, there were cases where ambiguous messages confused the market. In June 2003, the Fed lowered the benchmark interest rate to 1%, the lowest since 1958. Although the market raised the possibility of tightening, the Fed took no immediate action. According to the Fed’s Beige Book at the time, the Dallas Federal Reserve reported that "borrowers are increasing loans in anticipation of mortgage rate hikes" and "prefer to lock in low rates." In August of the same year, the Fed made it clearer in its statement that it "planned to maintain policy easing for a considerable period." After clarifying that tightening was unlikely soon, long-term interest rates began to decline.

Earlier this month, a divergence between the tone of the Fed’s statement and the Chairman’s remarks left room for interpretation. Despite the hawkish statement that "there is still room for inflation to rise," the market cheered Jerome Powell’s comments on "inflation slowing." However, after labor market data was released, the situation changed within a week, and disappointment grew. This was the result of a market exhausted by rapid rate hikes interpreting the situation in the way it wanted to believe and hear. The Bank of Korea expressed concern that "the gap between market and statement perceptions could increase volatility." There is a Wall Street adage: "Don’t fight the Fed." For now, patience is the best course until evidence of falling inflation is reflected in the statements.