We Don’t Need a Broad Consensus

I am on vacation, but apparently can’t stop myself; more of a thought piece here on why we think broad consensus is important.

Reporting on the Jackson Hole conference, the Wall Street Journal’s Nic Timiraos brings us this

“For the chair, what you care about is agreement on the decision. You don’t care about agreement on the reasoning,” said Adam Posen, president of the Peterson Institute for International Economics in Washington. That created a limit to Mr. Powell’s ability to communicate clearly about why the Fed was cutting.

“He’s speaking for a committee that has multiple reasons for voting as it did,” said Mr. Posen. “It’s not good for Powell to pretend there’s more coherence or clarity than actually exists.”

I feel this view stands in contrast to what I would call the traditional view that the Fed needs a consensus framework to make and explain policy decisions.  The lack of a consensus about the reason for cutting rates is thus a “problem” that needs to be resolved for clear communications and the associated lack of consensus about the need for cuts means then that actual policy could be much more hawkish than anticipated without Powell’s firm guidance.

To be clear, my own analysis follows this line of thinking as it also consistent with the direction the Fed has taken in recent years, especially visible in the lack of policy dissents among governors and also I think in pursuit of clearer communications. Such a framework views a lack of consensus as a challenge to clear communications that can hinder the effective transmission of monetary policy.

Posen comes from a Bank of England background where policy dissents are the norm, not the exception. So from that perspective, the ability of Powell to pull together a very coherent and clear story really isn’t that important; it’s the final decision that is important.

I inclined to think that Posen is more right than wrong here and that we spend too much time caring about whether Powell has a consensus for policy actions or can clearly describe the reasoning for the action. At a certain point, why does Powell’s energy need to go into making everyone on the FOMC happy? To what extent does that slow the responsiveness of monetary policy? I am thinking of this given what I expect to be the breathless coverage of Fed presidents who don’t agree with another rate cut. The perceived need for consensus likely forces us to put too much weight on hawkish comments like today’s by Philadelphia Fed President Patrick Harker. Consider this, for example:

Nothing is moving dramatically in a negative direction. There is potential for it to do. And I think we need to keep our powder dry so when that happens we have the policy space to move.

This is just plain bad policy. It is essentially the same as saying the Fed should be hiking rates to create policy room for the next recession. It makes no sense to hold onto “dry powder” until something dramatic happens. At that point it is simply too late – you need to use your policy tools ahead of the drama, not after.

I am not so sure that there is much value to trying to cobble together a consensus view that incorporates the dry powder” contingent. Just like I think efforts to soothe former-Dallas Federal Reserve President Richard Fisher were a colossal waste of time. Why couldn’t we just let him dissent and then ignore him? Why keep alive a false sense of the need for broad consensus that gives some policymakers more influence that they should or do have?

Bottom Line: I am thinking about Powell’s lack of clarity in a different light. Whether intentional or not, Powell could be managing a paradigm shift that downgrades the need for consensus. That we get to the right outcome is what’s important; that everyone agrees on that outcome less so. Maybe our bias against 60/40 splits on the FOMC hurts policymaking more than it helps.