Tapering, Talking, Tightening: The Federal Reserve’s Masterful Messaging

• “The Fed’s Rate Projections May Cloud Messaging” – Wall Street Journal headline (September 22, 2021) 

• “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates…” [2x] – Fed Chairman Jerome Powell (June 10, 2020)
• “We’re not even thinking-about-thinking-about-thinking-about raising rates…” [3x]– Powell (July 29, 2020)
• “It is not time to start talking-about-talking-about tapering…” – Powell (March 2021)
• “We are talking-about-talking-about tapering.” – San Francisco Federal Reserve Bank President Mary Daly (May 2021)
• “You can think of this meeting as the talking-about-talking-about meeting.” – Powell (June 2021)
• “While no decisions were made, participants generally view a gradual tapering process that concludes around the middle of next year is likely to be appropriate.” – Powell (Sept 22 2021)

Tapering? Tightening?

Heavens, no, we’re not thinking about (thinking about (thinking about)) that… Nor talking about talking about it… until, ok, now we are, sort of, but we’re only talking about talking about it… ok, now we’ve started actually talking about it...[But talk is just talk]… goodness no, we’re not actually deciding to do it, no one is doing any deciding here…

The long slow arc of the potentially painful shift in monetary policy underlying all this has been rendered at least rhetorically amusing – and that is a big part of its effectiveness. The word-play conveys somehow a sense of confidence and unconcern. “No worries, folks. You won’t feel a thing. Everything’s-under-control – see, we can even joke about it.”

Powell’s statement yesterday (September 22) is the masterpiece of its type, building upon fifteen months of this playful circumlocution, downshifting into bureaucratic blandness. The climax is couched in such soft phrasing: “no decisions were made”… “gradual process”… “likely to be appropriate” … 

The Era of Messaging 

The leaders of the Federal Reserve have learned something important in the last twenty years: messaging matters more than the message. This is true even – and especially – when, as now, the substance of the message is obvious, and fully expected – even, we would say, priced in. They have learned the hard way that bad packaging can make a mess out of good policy. They understand that a successful Fed chairmanship has now much to do with the command of nuance, and a sense of how to manage the ephemeral moods of the market. Fortunately, it turns out the Jerome Powell is one of the best market whisperers ever. His skillful management of the phraseology surrounding the epochal shift in monetary policy will go down as a classic case study in superior message control, and therefore superior public policy.

Messaging The Turn

The substance of the policy shift is quite serious, and has riveted investors for quite a while. The Federal Reserve will turn a Big Corner sometime in the next few months, change direction – and begin the long-delayed process of… well, let us call it re-normalizing monetary policy.  

The change is coming. It is a certainty. The decade-long, multi-pronged program of monetary stimulus is going to slow down, stop, and finally go into reverse. It may take up to two years to effect the full 180° turn from “easing” to “tightening” – and it could take another full decade to fully restore the status quo ante (where ante refers “before to the 2008 financial crisis”). (And to be sure, there may never be a full restoration. The world turns too, and events may have their way.) 

It is overdue. The massive monetary stimulus program that has injected trillions of out-of-thin-air dollars into the financial system since 2008 has either (1) worked to perfection, or (2) made clear its ineffectualness (the debate rages). Either way it must come to an end. When the pandemic hit, the Fed opened all the spigots and flooded the system with liquidity. Quantitative easing (bond buying)ratcheted up to a rate of $120 billion per month. But now, with the economy now growing vigorously, 6-8% this year – the strongest recovery in decades – and with more trillions of dollars of fiscal stimulus spending coming online soon… we really don’t need the Fed’s conjured money anymore. Everyone knows this.

The first downshift – from stimulus to “neutral” – should have come earlier. But the markets are addicted to the Fed’s “accommodative” policies, and the view now seems to be that the detox needs to be handled with great care. Regulators and investors have become psychologically coupled over the last several decades.

The Fed and the Markets both appear to be trying to outguess each other.

For the Fed’s part, the nation’s central bankers have accepted the premise that maintaining the healthy tone of the stock market is now in effect part of their mandate, right alongside controlling inflation and promoting full employment. This troubles some observers. I recommend here the insightful comments of noted hedge fund manager David Einhorn, in a 2010 discussion with Charlie Rose, in which Einhorn analyzed at length the Fed’s responses to market events. His remarks are too long to quote in full here, but his conclusion is blunt:

• “It sometimes feels that the Federal Reserve is more concerned about which way the next 50 points in the S&P go than your average hedge fund manager is.”

On the other side, the markets have become hyper-attuned to the twitches, glitches and botches of any and all Fed spokespersons. Since the Greenspan era, Fed meetings and press events have moved the markets more than any other single factor – this has been quantified: as much as 80% of the market’s gains cluster around the handful of dates every year on which the Fed’s Open Market Committee meets. 

The market’s reactions skew negative. Linguistic miscues by Fed leaders often create sudden market downturns. One of the more extreme instances of “blowback” from the markets occurred the last time a Fed chairman suggested the possibility of dialing down the stimulus – when Ben Bernanke in 2013 allowed, offhandedly, as how the pace of bond buying might start to wind down “in the next few meetings” (of the Fed). Those “five little words” simply crushed the bond market. Investors sold, prices fell, yields on the 10-year Treasurys doubled overnight — and remained elevated for the better part of 2 full years. That episode gave the financial world a new vocabulary, and something new to fear: tapering.  

Ever since, the Fed has been preoccupied by the question of how to manage the shift away from stimulus – to start tapering the bond buying program – without provoking a repeat of this market panic.

Fear of Fear Itself?

Fear, yes, it drives the markets, and it has guided policy, even overruling prudent macroeconomic principles. But in this case – fear of what? What is it in the Fed’s style of communicating its policies — which may inhere in just a few words delivered, almost offhandedly, by the Chairman – that can so unsettle the market?

To be clear, it is not a fear of fundamentals. 100 basis points up or down never drowned a kitten, brought down a government, or ruined a recovery. Yet some observers have become unhinged at the possibility of a rise in bond yields. Bill Gross (the once-upon-a-time “bond king”) is constantly on edge: 

• “Treasury yields are so low that the funds that buy them belong in the “investment garbage can.” Ten-year yields traded at 1.29% as of 6:07 a.m. in New York [3 am where he lives on the West Coast]. They are likely to climb to 2% over the next 12 months… Stocks could also fall into the category of “trash.” 

This is open hysteria. What would be the effect on the real economy of 2% Treasurys? How about…Very little. Or even none at all. The 10-year Treasury Bond Yield was at 1.75% in March of this year, in fact — and the economy is still surging, while the stock market has seen 54 record highs since January. 

The real effects of Fed statements, and even Fed policy moves, on the real economy are smaller than many assume, and slower to develop (relative to the market’s typical near-term mindset). Tightening? A 1% rate rise, say, in early 2023? Does the (inevitable, long-anticipated) end of zero-to-negative interest rates in the Western world portend an economic apocalypse? Does the market even look that far out? 

• “We get very worked up about whether the Fed will initiate its lift-off at the end of 2022 or in early or mid-2023 after all. And we disagree about whether the ECB will follow suit in 2024 or in 2025 . . . But to be honest this uncertainty is quite small in comparison to what used to be at stake. All that is a long way off yet.” 

The fear is rather…a fear of poor messaging. 

Consider how strange this is, from an information-processing perspective. With respect to monetary tightening, to repeat: We all know exactly what is coming. There is no surprise with respect to the content of the policy. [In information-theoretic terms, therefore, the message contains no actual information – see Claude Shannon. His famous theory holds that if an event is completely predictable, it does not contain new information. The behavioral measure of information is therefore the degree to which it is unpredictable, uncertain, patternless, random, “surprising.”]

There is really no surprise with respect to the timing of the policy either. We know when tightening will start (within a short window), and what it will look like. What worries us is… the style and tone of the message. 

The Beauty Contest Problem 

Style and tone are aesthetic concepts. Is this really all about how things sound? Rather than what they say?  

Yes. And here we enter into the loop of the market’s tendency towards reflexivity: I react not so much to how it sounds to me, but how I think it sounds to all the rest of you, and what you will do about it. In other words, the market reacts to what it thinks its own reaction will be. It reacts to itself.  

John Maynard Keynes put this paradox famously in terms of an analogy to a peculiar sort of “beauty contest” – his metaphors are always worth revisiting – 

• “Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that teach competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

This averaging of averages is part of the context in which “messaging” has developed. 

The Era of Messaging

Messaging. The word – as a verb – did not exist before about 1980.  

It is not just a new usage. “Messaging” is a new instrumentality, a new strategy of communicating, created/necessitated by the transformation of the media in the last several decades. Here’s how.

Before about 1980, the news delivered through the channels of the “old media” was – by current standards – narrow, focused, perhaps stunted, and information-dense. First, there was the daily newspaper, a discrete burst of information, with 24 hours to grow stale. Then came radio broadcasts, which were “events” in themselves – Roosevelt’s fireside chats, or Edward R. Murrow’s London blitz broadcasts. Later the three TV networks, each with a nightly news show that (allowing for commercials) could carry 22 minutes of actual information – and a few infotainment features (The Today Show). If we assume that the volume of “news” back then was at least roughly the same as today – that the world generates structurally a more or less standard quotient of important new information per fixed time period – then the density of information in the narrow channel, the signal-to-noise ratio, was high. Airtime was limited. The packaging had to be super-efficient. 

Today of course the total collective capacity of the new media (i.e., all the channels taken together) is hundreds, thousands of times larger. Instead of 22 minutes times 3 (ABC, NBC, CBS), we have 24×7 times hundreds of channels – or perhaps millions, if we include social media like Twitter and Facebook and Youtube and the blogosphere. Filling the channel became a challenge – which generated the “news cycle,” endlessly rehashing and commentating and hyperlinking and retweeting the same stories. It becomes a frenzied play for audience attention — which is also limited.

It is Keynes’ beauty context super-charged and magnified beyond all imagining.

The ratio of real news to channel capacity has decreased precipitously. The Signal-to-Noise ratio is infinitesimal.

How can anyone communicate effectively in such a din? Again, what is needed is super-efficient packaging – not because the channel is so thin, but because it is enormous and filled with “noise.”

Messaging is a response to this problem. It is a way of distilling and compacting the information into a very precise “bullet” that can penetrate the media cacophony to convey the real essence of the news in a very brief, but very powerful signal. The markets have learned to listen for the actionable “message” buried in the meaningless noise. When Europe heard Mario Draghi say “whatever it takes” — they immediately knew that the Euro would survive. The bond markets exhaled.

In short, messaging is a strategy not just for communicating but for effecting policy. The Talking itself becomes the Doing. Good messaging moves the markets in the “right” direction. Poorly or sloppily executed messages can wreak havoc (as the taper tantrum showed). This is the increasingly the focus of the Fed’s attention, and the Turn-Towards-Tightening is a good case study of the use of messaging, unfolding in real time. 

Messaging as a Leadership Skill

Messaging is a clearly a required skill for 21^st century leaders. It originated in the public sector but it is penetrating the business world as well. The Earnings Call has indoctrinated CEOs and investors alike with the power of messaging. Academia, too. The university I work for has just hired some who is in effect the Director of Messaging, who will function alongside, and to some extent above, the more traditional “marketing and communications” people. Their traditional role is to generate copy for ads and articles, brochures, press releases – “communications.” The new Director’s role is to create the themes and the compact expressions to curate and target information-dense signals that will have the greatest impact, the ones that audiences are actually listening for.

Not everyone has the knack. Jerome Powell is a great messager (there’s an obvious new coinage). Janet Yellen, join the other hand, was and is an inept messager. Clear, correct messaging is very powerful. “Cloudy” is not good –

• “The Fed’s Rate Projections May Cloud Messaging” – Wall Street Journal headline (September 22, 2021)

Marshall McLuhan – the communications theorist popular in the 1960s – was famous for his enigmatic slogan: “The medium is the message.” By which he meant, more or less, that what mattered most was the nature of the channel through which the message was delivered. The same content is very different in book-form compared to a movie. 

Now it is the other way around. The “message is the medium.” It doesn’t matter whether we watch Powell’s news conference live, or read it on the Bloomberg news-feed, in a tweet from a friend. It is those “five little words” – or maybe just one word sometimes – that we are listening for. At least for monetary policy-makers, effective messaging has become the key to effective policy.

And yes, it may have been masterful. The Dow was up 500 points the day after the announcement. Bond yields rose a little – 10 basis points – and seem to have stabilized by day’s end. It may be that Powell averted the tantrum. We’ll see soon enough.