If anything is disturbing to Charles Calomiris after reading the minutes of the Federal Reserve’s last policy meeting it’s that the central bank has lost its way, unable to agree on even the most fundamental aspects of its policy making tasks, and even worse having no clear consistent model for getting back on track.
When I talk to Charlie right after the release of the minutes of the October meeting, he says what’s interesting and unusal and made them newsworthy is “they didn’t just reinforce what we already knew… that there was disagreement on the Committee about what to do <at their policy meeting> in December… they showed that that disagreement was quite fundamental, and I would say unusually so, that it’s not just one dissent.”
“There are many people who think, differently from the dominant group, which means things could swing.”
Furthermore, it’s not just that Fed officials disagreed about whether or not to cut the key rate again at the December meeting. What Charlie, Professor Emeritus at the Columbia Business School and a longtime member of the Shadow Open Market Committee, sees as something much more important than at we usually see in a FOMC minutes write-up: “They…really are confused about the state of the economy.”
Charlie stresses that with “every aspect of monetary policy there was some kind of confusion…whether quantitative tightening is going to cease, and everything <reported in the minutes> very vague about that.”
Bottom line, he says “it seemed to me… as I read the minues… that the Fed just…doesn’t hav e a rudder right now… they don’t know what the tariff policy is going to be either, but you know they don’t agree about how to think about that…The FOMC doesn’t agree about how to think about inflation right now. It doesn’t agree about how contractionary monetary policy is right now.”
What does the Fed need to do now to correct this? Dive in and hear why Charlie urges us all to take a look at what economists like former Philadelphia Fed Bank president Charles Plosser, renowned economist Milton Friedman, and Calomiris himself - and many of his colleagues at the Shadow Open Market Committee - have have pushed for: Systematic Monetary Policy, that “forces the FOMC to declare some common ground.”
In fact, he lauds Fed governor Chris Waller for taking a stance on tariffs that Charlie has also recommended which is that when a supply shock like the tariffs hit the global economy, creating great uncertainty around where inflation goes next, policy makers have to look past this, do estimates of how it will affect the inflation rate, and move on. In sum, “In fact, I didn’t read anything in the minutes that suggested that.”
Charlie’s been working on paper to systemetize analysis of FOMC minutes and found… 00:02:03.170
Well, for the minutes releases, we find a very strong piece of evidence, which isn’t that surprising, which is they don’t really move markets very much. And that’s because… The… they’re preceded several weeks by a release. And a discussion of the release. So what the minutes really do is they… they fill in, usually. I think that these minutes may be a little different, but almost always what the minutes do is they just confirm and add some nuance to the real news story which preceded it with the release. I think that that’s maybe a little different, this time, in these minutes.
These minutes; very strange - 00:05:14.500
Well, I think what’s really interesting and unusual, and the reason I think that the minutes today probably did matter a lot for the news, is because they didn’t just reinforce what we already knew, that there was a disagreement within the committee about what to do in December. They showed that that disagreement was quite fundamental, and I would say unusually so. That is, it’s not just one dissent. There are many people who think, differently from the dominant group, which means things could swing.
Disagreements on December/ Confused about the economy 00:05:55.150
Furthermore, it’s not just that they disagreed about the December They, they really are confused about the state of the economy. There was a lot of disagreement about how contractionary monetary policy is right now. This is a disagreement you and I have talked about before, which is not really feeling like they know what R-star is, that is, what the equilibrium interest rate is. How contractionary is monetary policy?
Rudderless may be even compass-less Fed 00:06:25.530
And then there was further discussion. Really, every aspect of monetary policy, there was kind of confusion. So there was also a discussion of whether a quantitative tightening was going to cease, and everything very vague about that. I was trying to figure out, well, what are they really trying to communicate in the minutes? And again, I couldn’t really <tell>… so it seemed to me like the thing that really came out as I read the minutes was that the Fed just… doesn’t have a rudder right now. It’s just, they don’t… they don’t know… of course, we all understand, they don’t know what the tariff policy is going to be either. But, you know, they don’t agree about how to think about that.
Abject failure to communicate and provide direction 00:07:15.760
So, so it’s quite, sort of like… The FOMC doesn’t agree about how to think about inflation right now. It doesn’t agree about how contractionary monetary policy is right now. If you were to… Go ahead. If we were thinking about, you know, about Charlie Plosser, the late Charlie Plosser, our good friend. If you ever wanted to see why it’s so important for there to be a discussion of what systematic monetary policy is, and forcing the FOMC to declare some common ground, which is what systematic monetary policy requirements would do.
If you ever wanted to see why people like Charlie Plosser and I, and Milton Friedman and so many people Have advocated that. This is the minutes to read, because You realize they’re causing so much harm. with the confusion, with the way that they’re creating confusion in the markets, that you can really see the advantage that would come from forcing the Fed to make some kind of systematic framework
Something from the minutes that came out today: 00:09:18.980
Most participants noted that, against a backdrop of elevated inflation readings and a very gradual cooling of labor market conditions, further policy rate reductions could add to the risk of higher inflation becoming entrenched, or could be misinterpreted as implying a lack of policymaker commitment to the 2% inflation objective. _Note that the Fed said this three weeks ago and still cut rates…
A strange confrontation with reality 00:10:04.750
Well, no, I… well, it’s also, itself, kind of confused and an understatement. What a huge understatement. At a time when the Michigan surveys are telling us that people’s 5-year inflation expectations might be double what the FOMC’s long-term target, stated target is, at a time when the Fed has completely lost credibility. By the way, that fact that I just cited shows that the Fed has lost credibility. Its long-term target is treated with a huge grain of salt. Nobody, nobody takes it seriously.
So, to say, as the quote you read said, that there’s a risk that maybe inflation might become entrenched, it’s sort of almost laughable. Of course, inflation never… the Fed never got that soft landing that they had predicted. The only indicator that we’ve ever seen that we were getting to a 2% rate of inflation. The only indica… or close to it, was the Fed’s own forecast of it. There was no other information that the Fed based that on that was a reasonable basis. So, of course, the Fed’s completely adrift about this.
Little consensus on FOMC about anything important for policy 00:11:18.100
Furthermore, another major problem is… that the Fed officials don’t agree about how to think about tariffs’ relationship to inflation. So, you know, Chris Waller, I think, got it right when he said that what you do when you have a supply shock that affects prices is you have to look through the effect of the tariffs. So what that means is that you do a detailed estimate, that’s one approach at least, do a detailed estimate, and then you adjust your inflation rate for that.
So Chris Waller has specified a very particular way to continue targeting inflation. In the presence of tariff shocks. That has not been adopted as a general point of view, and the language that you just read indicates that people are confounding the effect on inflation of tariff price changes, and not talking about looking through or adjusting them. In fact. I didn’t read anything in the minutes that suggested that.
A second excerpt from the Minutes… 00:12:45.480
Many of these participants also judged that, with more evidence having accumulated that the effect on overall inflation of this year’s higher tariffs would likely be limited, it was appropriate for the Committee to ease its policy stance in response to downside risks to employment.
This speaks of deep divisions 00:13:14.060
I don’t know, but from what I’m gathering, the important thing is that it’s not just that there’s one outlier, or even two. It’s really that the opposing camps that are being described in these confused statements consist of at least, let’s say, three people on either side. So, I think that that’s the… at least that’s the impression I get. I think many is certainly more than two, and most is certainly more than two. So I can’t really parse for you whether it’s many or most. But if it’s 3 people, that’s really very different, right? That really tells you that if you have, sort of, two large groups of people who are diametrically opposed, that means things can swing in either direction.
And I want to keep emphasizing, they’re not just opposed about whether to do a rate cut in light of an agreed understanding of the economy. They’re opposed about their understanding of the economy. They don’t have a… clear sense of where monetary policy is right now. Neither do they have a clear sense of how they should react to tariffs.
Fed avoids systematic monetary policy- a mistake 00:14:29.820
So, what would a systematic monetary policy mean? It would mean that the committee would actually have to vote and reach a consensus that it would state about how you should react to tariffs. I like the Waller view, but they haven’t advocated that. If they did advocate that, that would create huge information and comfort. The markets would know how to react to news, because they would know how the Fed was going to react to that news. And similarly, if they could at least reach a vote and say, here’s what we think our star is. That would also be really useful.
So, I just want to keep hitting this, because I think that people don’t understand why systematic monetary policy is so important. It’s important because it helps the markets understand what the Fed’s going to do, so the Fed doesn’t cause more damage, rather than help. And at this point, we’re just, like, completely out at sea. I don’t know. We don’t know how the Fed’s going to react to evolving news.
Fed seeks to avoid accountability 00:16:55.030
Well, I don’t think the Fed will ever Choose to be systematic in a credible way, because it doesn’t want to constrain itself. And that’s really a common human aspiration, to avoid accountability. So I think, Kathleen, we have to talk about the governors as if they’re people, almost. And they don’t want to be accountable. The only way they will be forced to do it is if Congress requires it. Congress has to require them to make monetary policy systematic and to say what that means. So, no, I don’t think they’re going to do it. But I just want to point out that… how different it would be. Imagine if right now we knew that what the Fed was going to do is…Adjust… whatever inflation shock happens. First, determine the extent to which it reflected a tariff price shock, and then remove that from the… from their reaction. Imagine that’s what Waller has been advocating, and that’s what I’ve been advocating. Imagine if the Fed actually said, that’s what we’re going to do. Then, a news story comes out 4 weeks from now, and says. Oh, prices jumped 4%. But it was all the result of a tariff pass-through that we can see. See? And then we would all say, okay, well, we know that the Fed is not going to tighten in reaction to that.
What would be useful… 00:18:26.060
The problem is, right now, what we really need to know is not just what’s going to happen and… what the Fed thinks about December. That’s almost useless because they’re so divided. But what they could really do that’s useful for the market is tell us how the Fed will react to inflation, and to what extent its reaction will take into account whether the inflation shock is the result of tariffs. That would be hugely beneficial.
Powell is not an economist and does not seem to ‘get it’ 00:19:27.150
That’s exactly… that’s exactly right, and it’s… I think it’s well established a procedure for monetary policy, and when we… back in the 70s, we learned those lessons the hard way. I will say, without trying to be mean, I don’t think Jay Powell… I don’t think Jay Powell has ever exhibited a clear understanding of the economics of what we’re just talking about. He’s not an economist, and it’s… I think it’s very telling that Chris Waller is the one who says. Hey, you know, we’re experiencing a textbook case right now, and here’s what the textbook says we should do. And yet, that’s not coming from the chairman.
Fed needs to reveal its true reaction function 00:20:43.790
I can’t… I can’t tell. I think that, I do sense that there is one… there was one element I thought was interesting, again, I think it’s correct, which is the recognition that positive developments coming out of AI, which could affect productivity growth, could also be helpful in keeping inflation from taking off further. So there was a kind of nuanced understanding that, part of the uncertainty in the economy is that we have things kind of going in both directions in terms of real GDP growth. We have a weak labor market, we have a sort of uncertainties that are driving people to delay hiring. the uncertainties of effects of tariff policies on real GDP growth, which I think they would be quite negative if the tariffs are allowed to remain. So there’s an understanding that you have negative, sort of, headwinds, but there’s also an understanding that the AI revolution is having not just a positive effect On GDP growth, but also on productivity growth.
So, I think that, but it’s that very sort of uncertainty coming from both directions that, again, sort of cries out for tell us a little bit about what your… what monetary policy’s reaction function is. What is the systematic nature of monetary policy? Because if all you tell me is you’re going to be data-dependent, and then I know that there’s… they’re different indicators are pushing in different directions, I’m even more confused, right? So, it’s not helpful to tell me that we see both positives and negatives. That’s not helpful at all. In fact, quite the opposite. Because you’re not telling me which positives you’re applying which weights to…There are some macroeconomic indicators that sort of are deserve more weight. and that we’re going to react more to those, I think that’s helpful. It tells the market what to expect. So.
Rate cuts work if there are enough of them 00:23:28.010
I’m not saying that just cutting rates a quarter of a percentage point immediately turns the economy around, because you were kind of, I think, just now expressing some skepticism. about whether a rate cut could really deliver much of a change. And of course, the answer is, cumulatively, it can. So I think, again, the point is. I’m not looking at December by itself a quarter of a point as being decisive. What we really need is to know medium term what are the indicators that the Fed’s really looking to? Because it’s a mixed bag. We know it’s a mixed bag. We know the labor markets have looked weak. We know that the productivity growth in the stock market and AI stories are giving us some you know, positive sort of sense. We know that we’ve had positive shocks as well as negative shocks. Positive shocks coming from the tax bill, from deregulation, negative shocks coming from the tariffs. So, we’re confused for a reason.
Fed needs to communicate provide structure 00:24:32.100
What we need is the Fed to sort of help us by saying, we’re putting the following weights on real variables, so in a consistent way, not just between now and December, but in a consistent way over time, so that as we’re watching that evolve, we have a sense of what’s the trajectory of monetary policy. There is no trajectory right now, Kathleen. there’s no trajectory. We don’t know if it’s going to be the next…Change is going to be a cut or an increase. And we don’t know how to tell… How we should make our opinion about that react to developing news. I mean, that’s a disgrace, right? If your central bank has you in the position where You don’t know whether the next meetings or the next few meetings are going to see no change, decrease, or increase, and you don’t know, between now and then.
Data dependency is not nihilism 00:26:15.510
And sure, you could say we’re data-dependent, but then explain, what does that mean? What does it mean to be data-dependent? If I see that a very positive AI story comes out. That makes me think that productivity growth contributions from AI are going to be a big deal. Should I put a big weight on that or a small? If I see that, job growth is slowing, should I put a big weight on that or a small? If I see that, as I said before, if I see that there’s a big price jump, it’s clearly related to tariffs. Should I think that that means that the Fed is going to decide that it doesn’t need to worry about that price jump? Or should I think the Fed’s going to worry about it? So there’s no reason that the Fed can’t tell us in advance by actually themselves putting some discipline on themselves and agreeing on how they’re going to react to that. I keep coming back to Chris Waller’s statement, you know, if they could just, like, all say, yes, this is how we’re going to think about it, that would be hugely helpful.
Bottom line Fed tried to avoid being judged 00:27:19.970
But they could also do the same thing by telling us what weight to apply on different macroeconomic indicators that are likely to be going in opposite directions. So I just think there’s no excuse. I’m sorry, I know it sounds like I’m being very harsh. But there’s no excuse for a central bank refusing to discipline itself in a very helpful way. Simply because, as they always do, they want to avoid accountability and maximize their flexibility. But, you know, the market needs something a little better than that.
CHARLES CALOMIRIS
Charles W. Calomiris is Henry Kaufman Professor of Financial Institutions at Columbia Business School, Director of the Business School’s Program for Financial Studies and its Initiative on Finance and Growth in Emerging Markets, and a professor at Columbia’s School of International and Public Affairs.
Charles was a Distinguished Visiting Fellow at the Hoover Institution and Co-Director of Hoover’s Program on Regulation and the Rule of Law, a Fellow at the Manhattan Institute, a member of the Shadow Open Market Committee and the Financial Economists Roundtable, and a Research Associate of the National Bureau of Economic Research. Professor Calomiris is past president of the International Atlantic Economic Society, and has served on numerous committees, including the Advisory Scientific Committee of the European Systemic Risk Board, the U.S. Congress’s International Financial Institution Advisory Commission, the Shadow Financial Regulatory Committee, and the Federal Reserve System’s Centennial Advisory Committee. He serves as co-managing editor of the Journal of Financial Intermediation.
Professor Calomiris’s research spans the areas of banking, corporate finance, financial history and monetary economics. He received a B.A. in economics from Yale University, Magna Cum Laude, and a Ph.D. in economics from Stanford University.
Professor Calomiris is the recipient of research grants from the National Science Foundation, the World Bank, the Japanese government, and many others. He holds an honorary doctorate from the University of Basel. He has consulted for central banks, the IMF, the World Bank, and many foreign governments. In 2017, Calomiris wrote Reforming Financial Regulation After Dodd-Frank (Manhattan Institute for Policy Research), where he reviewed the shortcomings of current regulatory practice, identifies the principles that should guide our regulatory architecture, and suggests reforms that are consistent with those principles. His book co-authored with Stephen Haber, Fragile By Design: The Political Origins of Banking Crises and Scarce Credit (Princeton 2014), has been translated into five languages, received the American Publishers 2015 Award for the best book in Business, Finance and Management, was named one of the Best Economics Books of 2014 by the Financial Times, and one of the Best Books of 2014 by The Times Higher Education Supplement and by Bloomberg Businessweek.
