Remarks by high-ranking Fed officials act as policy signals... Adjusting Market Expectations

(New York = Yonhap News) Correspondent Kim Yeon-sook = With the head of the U.S. Federal Reserve (Fed) refraining from giving signals about the future interest rate path, a series of recent remarks by high-ranking officials of the Federal Reserve are actually acting like 'policy signals' in the market.

In line with Federal Reserve Chairman Kevin Worthy's communication policy of avoiding preemptive guidance (forward guidance) and leaving judgment to economic indicators, attention is focused on the background to the Fed leadership's remarks that ultimately moved market expectations.

On the 29th of last month (local time), New York Federal Reserve Bank President John Williams said that it may be appropriate to raise the benchmark interest rate once more at the end of this year, but that there is no need to rush.

Next, Federal Reserve Vice Chairman Philip Jefferson also said that data trends and forecasts must be carefully reviewed when adjusting policy on the 1st of this month, and that it may take more time to make a decision.

Such remarks were interpreted as suggesting ‘adjusting the pace’ of raising the base interest rate. The market lowered expectations for a Federal Reserve interest rate hike in October.

Even before Governor Williams' remarks, the probability of an interest rate increase in October reflected by the market was about 70%. Afterwards, expectations of an interest rate hike quickly receded as price indicators became weaker than expected.

This is why the market paid attention to the remarks of the two figures, made two days apart, in a situation where Chairman Wash's policy signal was lacking.

The president of the New York Fed not only has a permanent vote on policy decisions, but also customarily serves as vice chairman of the Federal Open Market Committee (FOMC). This position has been considered a member of the Fed's 'troika' that leads monetary policy along with the Fed Chairman and Vice Chairman.

In the past, remarks by the Fed Vice Chairman or the President of the New York Fed were taken as a signal conveying the views of the entire Fed Troika.

Market experts see their speech as a clear attempt to temper market expectations and indicate that the Fed is taking a more cautious approach to its future policy actions.

According to Bloomberg News on the 2nd, Goldman Sachs economists synthesized their remarks and solidified their judgment that an interest rate hike in October would be difficult.

Evercore ISI's Chief Economist Krishna Guha also evaluated the two people's remarks as an "authoritative" message.

Michael Feroli, chief economist at JPMorgan Chase, analyzed that the two men's speeches were an attempt to manage market expectations.

“Both speeches convey the message that there is no need to keep raising interest rates at every meeting, and that the interval between increases can now be adjusted somewhat,” he explained.

However, there are differences in interpretation as to whether their remarks can be seen as typical preemptive guidance.

Ellen Meade, an economics professor at Duke University, explained that there is a subtle but clear difference between preemptive guidance that makes an interest rate change a fait accompli and preemptive guidance that adjusts the speed by saying that a decision will be made based on sufficient data.

There is no evidence that Vice Chairman Jefferson and President Williams coordinated the content of their speeches with each other or Chairman Wash in advance.

It has been revealed once again that even while Chairman Wash is refraining from signaling the future interest rate path, the market is somehow trying to read the direction of policy.