Bob Eisenbeis’s Federal Reserve career spans seven decades, from William McChesny Martin’s time as chair all the way through the terms of Ben Bernanke. This includes his ten years as the director of research at the Federal Reserve Bank of Atlanta advising the bank's president on monetary policy and overseeing the basic research and policy analysis that drove the decisions made then. So when it comes to translating the message from the minutes of the FOMC’s June meetings, the first one chaired by Kevin Warsh, Bob is our go-to-guy.
For starters, Bob sees minutes that follow a conventional pattern, with limited evidence of Warsh’s influence.
Bob says “…first of all, there was a lot of agreement on just what the situation was presently as far as the U.S. economy is concerned…whether you're talking about the staff forecasts and outlooks or the subsequent discussion of what the participants views were as as far as the economy was concerned.”
In terms of the signals from the Fed minutes Bob notes “first and foremost, they saw that inflation had increased and it was heightened.” And that while growth was “slightly above trend, <it> was stable,” and the labor market was steady, the “risk to inflation on the upside remained high… <so> clearly they were less concerned about the labor market this time around than <they> were at the last meeting.”
As for the Fed’s discussion of scenarios in the minutes, Bob is skeptical. Why? Because he sees the Fed’s monetary policy scenarios already provided in the SEPs, the Fed’s quarterly Summary of Economic Projections where members provide forecasts for GDP, unemployment, and inflation. These in turn generate their forecasts for interest rate policy moves for the calendar year via dots on a chart widely known as the dot plot.
When it comes to Fed communication, as Warsh speaks of the Fed removing forward guidance of its policy direction, Bob sees the dot plot is itself as a form of forward guidance because “if you say you’re not going to do forward guidance and you release dot plots, you’re providing forward guidance. So you know, that’s a distinction without a difference as far as I’m concerned.”
Will the Fed move to hike rates by the end of the year? He says, Yes.
”I think probably at some point you have to be willing to take an action. And sitting back and not acting is acting.”
So dive in and hear what will finally drive the Fed majority to make the move. Spoiler alert: he says it’s about maintaining Fed credibility.
“They’re going to have to essentially start pursuing that goal. They haven’t hit 2% for over 5 or 6 years… At some point, time is running out, and I think they’re going to have to start to move to ensure their credibility.”
Pretty standard minutes 00:01:30:01
Well, I would like to take a 10,000 feet look at the minutes as a first go. And there were some, I think, three major themes that were running through the minutes, which were largely worthless in the sense I could not not find a lot of references or indications of influence that he played on. The minutes were pretty standard in terms of what they covered and how they attributed views to various individuals.
Some basics: inflation 00:02:16:09
But in terms of some basic things, first of all, there was a lot of agreement on just what the situation was presently as far as the US economy is concerned. There was and this is true whether you’re talking about the staff forecasts and outlooks or the subsequent discussion of what the participants views were as as far as the economy was concerned, first and foremost, they saw that inflation had increased and it was heightened. So there was heightened inflation as far as the economy was concerned.
Basics: growth/Labor 00:02:59:13
Growth, on the other hand, was slightly above trend, was stable. It was pretty positive as far as growth was concerned. Labor markets which were stable.
Risks were not seen as balanced 00:03:33:02
And so the sort of overall conclusion from the analysis, whether you looked at the staff amounts or the what the various participants were saying, was that the risk to inflation on the upside remained high. And moved up. At the same time, they saw that the risks of the labor market had been reduced somewhat. So the risks were not balanced. And the way they were talking about just being balanced in the past, but essentially tilted more towards the inflation side. And yet the stable economy and the labor market, clearly there were less concerned about the labor market this time around that were the last meeting.
Scenarios (That’s what SEPs are) 00:05:35:02
First of all, with regards to scenarios, that’s essentially what the SEPs are. They claim they’re not forecasts that they are scenarios that members feel are the most likely. So in that sense, you know, I wouldn’t put a lot of weight on a particular word that characterizing what they’re talking about. Secondly, all of the people saw. A path that said that they expected policy rates to increase by the end of the year and then subsequently inflation moderate and tail off. So that’s and that was a pretty much a majority view of what they saw in the economy. That was the main theme. The other main theme I was going to mention, one main theme I was going to mention is what I, what I took from the minutes.
With admitted unbalanced risks why not hike rates now? 00:06:41:03
So the logical question is if they also rates going to be going up and they saw inflation risk going up and they saw this, the labor market stabilizing and the economy growing above trend, why not push the button and start to deal with inflation. Inflation. And we know policy works with long and variable legs. And even Kevin Warsh use that phrase.
Did uncertainty stay the Fed’s hand? 00:07:08:17
The Fed only was talking about it. And I think the key issue and the key factor is the other scenario. The other broad based theme. Okay. And that was uncertainty. And there were several causes of uncertainty. They saw pervasive influence throughout the entire set of minutes. Whether we’re talking again about the staff forecast or what they talked to about the people saw, about the influence short in the short term of tariffs.
Iran = Uncertainty & reference to AI 00:07:48:00
Problems with Iran. And third, their supply chain disruptions. So we’re looking at uncertainty with several different components. Not sure how they’re going to work out. And then the last element I would add, which surprised me more than anything else, was the pervasive references to the broad based influence of a of AI not seeing that in the minutes before.
AI: a multiplicity of impacts 00:08:20:22
And where did it have the impact? Well, they saw it impacting investment in investment decisions. That was driving the increase in investments in corporate investments was part of the increase in GDP contributing there. Secondly, they saw labor market risks and uncertainty due to what the impact of AI was going to be. And third, they thought AI could have a significant impact on productivity. All of those factors would increase growth and increase productivity and increase the potential growth rate of the economy going forward. But when.
‘When’ is uncertain...as well as ‘what’ 00:09:06:07
That’s and that’s uncertain. And so that’s why I think there was a broad based sense of consensus. We’re going to wait a little bit and see what happens. More how this plays out. Because they don’t they didn’t know about the timing. And, of course, you only have to look at the newspapers and the news reports from day to day to know that these sort of major uncertainties, particularly with regards to supply chain influences, how deep that is and how long it’s going to last.
Other uncertainties was well…fertilizer 00:09:40:17
You’re talking about. Yeah. I was quite surprised to hear how much fertilizer comes through the strait… 20% or more of the world’s, right. that that has a long run impact through the farm system and through whatever. So how that’s going to work out? We don’t know.
Inaction is a type of action…and scenarios- not so clear 00:11:28:23
Well, I think probably at some point you have to be willing to take an action. And sitting back and not acting is acting. And it’s essentially if you believe where you if you have a forecast that shows you where you’re going to be without break increases, and you have a forecast that shows you where you’re going to be with rate forecasts with regards to your inflation objectives, then that’s all you can work with. I mean, scenarios are just sort of you know, I’m not a fan of scenarios okay.
Scenarios are…nothing special 00:12:11:17
Because they’re just many segments of pulling out different options along the probability distributions related to forecasts and the equations that are used to put out the forecast. They just will generate different paths. Each one of those is the scenarios. I mean this this is not I mean this is not like weather forecasting in the sense that you have the spaghetti. You know, that’s what those are scenarios, right. Let’s see the spaghetti plot essentially. Isn’t that what the dots are? The dots are the spaghetti plot for the people who are making the decision.
Dot plots need to reveal better information- linkages not ID 00:12:59:14
What’s missing is we don’t know how to connect the dots. We don’t know whose inflation dot was associated with, whose unemployment dot, and whose was associated with the GDP dot. The first thing I would like to say is connect the dots. And I don’t need to know that person’s name, but I’d like to see, you know, one, a one for one or across all those different plots a b, a c, a d who the forecasters are. So you can see how consistent the scenarios are likely to be. Secondly. Okay. Like to see them at least quarterly <quarterly frequency> as opposed to annual. There’s not a lot of information…<have the dot forecast B for three months for a quarter not a forecast for the entire year>. Yes. Because that’s where the information lies in terms of quote scenarios, how people view what’s going on.
No Warsh dot; no problem 00:14:22:08
Tell you I think he wasn’t there long enough to form a strong enough opinion to make a dot. I mean, that’s I’m giving the credit there, essentially. Look, he’s there a week and a half. You have to think about this and what the impacts are going to be and what the implications are going to be. He’s he didn’t have time to do that.
Warsh kept his own views private 00:14:45:24
And so, you know, it’s reasonable that he didn’t put forward. And I also noticed and if noticed in the press conference he never said what his views were. True the way Powell would say from my perspective here’s what I saw. Here’s what the other committee Warsh never said what he thought.
A collaborative approach 00:15:33:17
Chairman Warsh did not express his own personal views, and essentially that sort of preserved options for him and sort of said he’s not strong arming the committee by imposing his particular views strongly in public, particularly if they’re on the edges of where the basic consensus views are. I view this as sort of going out of his way, not to sort of appear to be trying to control what the committee decisions are, but rather doing it collaboratively.
Warsh understands how the sausage is made 00:16:11:23
And I think that’s a reflection of his past experience that he’d been on the board before. He understood in ways that other chairmen who came in and never did, as to how the policies remain, how the analysis goes, how the process works, and he’s stepping back and essentially planting the seeds for maybe we ought to think about how we communicate to the public, for example, maybe go.
Eliminate forward guidance…eliminate the SEPs, too? 00:16:45:20
Maybe, we ought to sort of reassess. Do we want to provide forward guidance or not? It seems to me if you release the SEPs, that’s forward guidance in the sense that that tells you where people are thinking and viewing things if things don’t change. And so, you know, hassling over words, if you are going to keep with the SEPs is a distinction without a difference as far as I’m concerned.
To whom does the Fed communicate? 00:18:14:17
The definition of market not performing as well… Making mistakes. Clearly they have made a lot of mistakes. If they’re going to review the communication policy which he said he put these task force together. He’s putting them together. They’re going to look at communications. You first have to sort of ask the question who’s the audience? Is it the general public?
It’s a complicated proposition… 00:18:41:09
Is it financial markets? Is it businesses? Is it foreign investors? There’s lots of different people that have an interest, potentially in what policy is and what the fed is doing. Do they all have the same needs and do they have this? This gets very complicated. Once you start to get into the weeds of what this communication issue is, who needs what and how much, what information that would best serve their needs.
Peeling back evolution 00:19:14:06
Now just focusing on nothing is not providing any guidance at all. I mean, we were in that world for a long time. The Fed, way back when it first started, never even had never announced even what it did. Markets had discover and they’ve changed this. Communications has changed and has evolved over time. And it probably could and should. Well, again, I would I would essentially rely on the dot plot. Because that’s forward guidance. That’s communication. The best sort of look at what the policy makers are thinking about going forward. So if you say you’re not going to do forward guidance and you release dot plots, you’re providing forward guidance. So you know, that’s a distinction without a difference as far as I’m concerned.
Is policy restrictive? 00:22:24:01
Well, I mean, again, it depends on how you define restrictive. Our rates higher than what they expected them to be in the longer run. Yes they are. So, therefore, by definition, to the long run they are relatively more restrictive. Are they restrictive enough? Probably not. Okay. So I think you have to sort of put it in context about how, what do you mean by restrictive relative to what and where you’re going to go. And it seems to me that the real question is again, why didn’t if they move if there was a consensus that they needed to move? And that’s what the dot plots was suggesting was needed. Why didn’t they do it now? And I come back to the fact that they are not. Really clear. The word is uncertainty. …not that certain about.,, there’s a wide probability distribution around each of those scenarios.
Task forces…insiders and outsiders? 00:24:04:20
I did not interpret his discussion about task forces as saying that they would be made up exclusively of outsiders. I was under the impression it would be a mixture, and that would involve both inside and outside Federal Reserve Bank people, whatever. We don’t know what it’s going to mean at this point in time, but, you know, if the outsiders are not going to be that much informed unless you get outsiders who were former insiders.
He will be collaborative 00:26:30:13
I think he understands that once he’s in that position, he’s independent. And essentially he’s not an economist. He’s going to have to rely on his staff. And you can’t just pull these scenarios out of the top of your head and overrule the people who have evidence and data and deep analysis. So I see him working and having to work strongly with the staff, and I don’t I don’t see a threat from him in that way in that respect at all.
A sophisticated setting- which he understands 00:27:17:14
I think he he understands the internal politics, okay. Of how things get done. And he’s not the boss. He may be the chairman, but there’s a lot of people who have a role in policymaking and decision making. And if you don’t essentially adapt to what the culture is, you won’t last very long and you won’t be successful. And I he he comes in with a background that most people coming into that position don’t have and didn’t have. So I don’t see him being stupid.
Will there be rate hikes? 00:28:12:12
I think not doing so, particularly given the dot plots and where they’re suggesting things are going… if the data continue along the lines, they are to maintain their credibility. They’re going to have to essentially start pursuing that goal. They haven’t hit 2% for over 5 years… At some point, time is running out, and I think they’re going to have to start to move to ensure their credibility. If they don’t, that puts that at risk, because essentially they’re saying they need to move. Inflation’s going in the wrong way and we’re not going to move because why.
Credibility will require it… 0:29:03:10
They won’t be. They will not have a credible basis for their policy decisions if they don’t move well.
Bob Eisenbeis’s Federal Reserve career spans seven decades, from William McChesny Martin’s time as chair all the way through the terms of Ben Bernanke. This includes his ten years as the director of research at the Federal Reserve Bank of Atlanta advising the bank’s president on monetary policy and overseeing the basic research and policy analysis that drove the decisions made. He also worked in Washington D.C. at the Board of Governors and the Federal Deposit Insurance Corporation.
After he left the Federal Reserve, he went in 2008 to join the private sector as Cumberland Advisors’ Chief Monetary Economist. In this capacity, he advised Cumberland’s asset managers on developments in US financial markets and the domestic economy, their implications for investment, and trading strategies.
Prior to his time at the Fed he was the Wachovia Professor of Banking at the Kenan-Flagler School of Business at the University of North Carolina at Chapel Hill. He holds a Ph.D. and M.S. degree from the University of Wisconsin and a B.S. degree from Brown University.
