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Inconsistent Fed communication has not helped . Recent research finds that “ market volatility is three times higher during press conferences held by current Chair Jerome Powell than those held by his predecessors , and they tend to reverse the market ’ s initial reactions to the Committee statements .”
No wonder there have been extreme moves within the part of the yield curve that is heavily influenced by the Fed , and which serves as the basis for a host of domestic and international financial activities . Over the last few weeks , for example , the two-year yield traded in a highly unusual range of 1.5 percentage points , fueling talk — and not just within the specialized financial media — of “ bonkers bond trading .”
These divergences all come on the heels of earlier Fed mistakes . After persisting in its characterization of inflation
as “ transitory ” for most of 2021 , the Fed then failed to act promptly once it had belatedly “ retired ” that misdiagnosis . As a result , it ultimately had to slam on the brakes with an unprecedented series of four consecutive 0.75-basis-point hikes .
At this point , there is no denying that the world ’ s most powerful central bank has slipped in its analysis , forecasts , policy making and communication . That is the bad news . The good news is that the Fed can still right the ship by adopting a better strategic approach for its analysis and actions , and by addressing two major structural problems .
The first problem is groupthink : the Fed ’ s decision-makers seem to lack the viewpoint diversity and comprehensive expertise found in other major central banks . They would do well to follow the Bank of England ’ s example and add two independent external voting members to the Fed ’ s policy-making committee .
The second problem concerns basic accountability . While the Fed chair does appear before Congress twice per year , those hearings are not conducive to focusing on what really matters : Fed policy design and implementation . The process needs another layer of due diligence , with specialists in the field also reporting to Congress ahead of regularly scheduled testimony .
There has been much debate about whether the Powell-led Fed will be remembered alongside the ( Paul ) Volcker Fed for having conquered inflation , or alongside the ( Arthur ) Burns Fed for having opened the door to stagflation . My worry is that it may end up being remembered in a category of its own , as the Fed that undermined its own credibility , its political autonomy and America ’ s crucial anchoring role at the center of the global economy .
MOHAMED A . EL-ERIAN , President of Queens ’ College at the University of Cambridge , is a professor at the Wharton School of the University of Pennsylvania and the author of The Only Game in Town : Central Banks , Instability , and Avoiding the Next Collapse .
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