As President Donald Trump keeps up his attacks on the Federal Reserve's policies, Wall Street is cautiously embracing them, giving a passing grade to the Fed's communication since its shift in January to a "patient" approach on rate hikes.
The Federal Reserve Bank of New York surveys the main Wall Street securities companies it trades with and asks them how they would grade the Fed's communication with markets and the public since the last survey. The central bank asked for scores on a scale of one, for "ineffective," to five, for "effective."
Roughly two-thirds of the Wall Street companies, known as primary dealers, gave the Fed a score of four or five (more effective) in the latest survey published on Thursday, while 22 percent gave the Fed a score of one or two (less effective). The others were neutral.
The 3.4 composite of those scores is below Chairman Jerome Powell's 3.6 average grade during his term but above the 3.2 average achieved by each of his two most recent predecessors, Janet Yellen and Ben Bernanke, a Reuters analysis of all surveys available on the New York Fed's website shows. (For a graphic, see https://tmsnrt.rs/2XawZ6T).
A separate New York Fed survey of market participants that includes large investors showed that 57 percent gave the top two effectiveness scores while a quarter gave the lowest two scores. Both surveys were conducted March 6 to 11.
The grades are important because they help the Fed gauge how well its message is getting through to financial markets. The Fed relies on its credibility with investors to influence the economy.
After raising rates four times in 2018, a majority of Fed policymakers at their latest meeting in March expected that they would leave rates in their current 2.25-2.50% range for the rest of the year due to uncertainty about how much the global economy is slowing.
A well-honed message that rates are likely to stay on hold for a while can help ease financial conditions when central banks think those conditions overly tight. But if markets find the Fed's message confusing or not credible, they may surge or slump in ways that undermines the Fed's impact. That was the case late last year, when markets swung sharply in response to statements by Powell widely regarded by investors as communication missteps.
President Trump, meanwhile, has publicly slammed the central bank's prior rate hikes for thwarting economic growth and he also pressed policymakers to change course.
Lewis Alexander, the chief economist at Nomura Securities, said the Fed moved policy "quite a lot" from December to March and that calibrating their language so everyone could understand it was not going to be easy.
"Powell's stated intention to use plain language I very much endorse; there's nothing in this world that can't be explained thoroughly but simply," he said.
The Fed is increasingly keen on its ability to communicate. Powell has instructed a small group of policymakers to come up with ways to improve it, minutes of the Fed's March meeting published on Wednesday showed. This reflects concern that markets may take Fed forecasts on rates and the economy as promises rather than best-guess projections.
The emphasis on communications is also evident in Powell's decision this year to hold news conferences after every Fed meeting, double the previous frequency. Even the New York Fed's inclusion of the question on communications effectiveness in the March survey may reflect increased interest, given that historically it has posed that question only once a quarter.
Grades generally go up when the Fed does as expected and fall when it surprises, the Reuters analysis of grades over the last nine years show. The New York Fed did not make its pre-2011 surveys available.
Powell and other Fed policymakers have tried to dispel any perception that it could derail the economy by being too aggressive. Stocks leapt higher after Powell signaled he would be open to taking a go-slow approach on rate hikes.
In October 2015, when the Yellen Fed was navigating the difficult transition from years of super-low interest rates to a cycle of rate hikes, she got the worst grade of her tenure — an average 2.27 out of 5.
The Bernanke Fed did worse, getting a grade of 2.1 in late 2013, when they did not begin to taper the Fed's bond purchases in September as markets had expected. His grades later recovered as the Fed limited its controversial quantitative easing program.