Top Economist: Beware of the "artificial consensus" created by the Federal Reserve

Chief Economist Adrian of Allianz recently wrote that the Federal Reserve is still not transparent enough in some areas, creating "artificial consensus" and exacerbating market volatility. Here are his main points. The Fed repeatedly assures that a "healthy fundamental" economy gives it ample time to decide when to cut interest rates. After accepting this assurance, when new data shows otherwise, the market is surprised. This is the danger of sending a consensus signal when there is fundamentally no consensus. Think about the stories of two central banks last week. Both countries are long-established banks with influence far beyond their borders, facing the pressure of making subtle judgments to continue lowering inflation while avoiding unnecessary harm to economic growth and employment. As a result, they took drastically different approaches within 24 hours. The first protagonist is the Bank of England, which lowered its policy rate by 25 basis points in a 5-4 vote, reflecting the complexity of underlying economic issues. The other is the Federal Reserve, proud of forming consensus and reaching unanimous votes, but faced fierce criticism from analysts and the media in the days following the decision. Which central bank do you and your family, friends trust more economically? This is an important question because trust is the foundation of the central bank fulfilling its duties. Many financial structures today are built on the assumption that central banks are committed to maintaining public confidence in their policy-making. After all, inflation targets must be credible to stabilize inflation expectations; similarly, forward guidance needs credibility to smooth out fluctuations in policy adjustments over time. Trust and reputation are supported by providing greater transparency, a process that has evolved over the years into holding regular press conferences, releasing meeting minutes, and meeting records. In some cases, central banks make quarterly quantitative forecasts of major policies and economic indicators. The reputations of the Bank of England and the Federal Reserve are supported by positive outcomes, but they differ in how they communicate policy decisions. This situation reminds me of an old joke about lawyers and economists: unlike lawyers who can argue with 100% confidence even with a very weak case, economists need a very solid foundation to argue with enough confidence. The Bank of England incorporates independent external members in its Monetary Policy Committee and does not hesitate to show disagreements among its top decision-makers. All reasons behind the votes are explained in the days or weeks following the meeting. At the Federal Reserve, disclosing such a wide range of individual positions is almost unheard of. While the Fed prides itself on welcoming diverse viewpoints in closed-door discussions, it is also deeply entrenched in the tradition of unanimous decision-making. Therefore, it actually maintains significant barriers to openly dissenting views. Even the minutes released three weeks after the meeting tend to gloss over the full spectrum of viewpoints. To truly understand what happened, people must wait for the complete records to be released five years later. Don't misunderstand me. A consensus-based approach helps reconcile different viewpoints and analyses, which is valuable. But artificially created consensus—often for political reasons, or to save face—tends to blur and marginalize viewpoints that deserve broader consideration **The obsession with consensus, coupled with the lack of cognitive diversity in the structural framework and the high likelihood of falling into groupthink, will ultimately undermine the credibility that the Federal Reserve has been working hard to restore. The Federal Reserve's refusal to adopt the decision transparency of the Bank of England inadvertently reflects market complacency, as the market failed to consider the possibility of a faster and broader economic slowdown than expected. Therefore, when weaker-than-expected Purchasing Managers' Index (PMI) and the latest monthly employment report, indicating a clear economic slowdown, were released shortly after the conclusion of the Federal Reserve policy meeting, the market reacted strongly. The market had accepted Chairman Powell's repeated assurances that a "fundamentally healthy" economy and a stable labor market had given the Federal Reserve enough time to decide on rate cuts. When new data showed otherwise, chaos ensued, with the market quickly raising the probability of a significant 50 basis point rate cut in September from almost zero to around 80% on August 2nd. Investors also expected the overall rate cut cycle by the Federal Reserve to be faster and more substantial. This intense reaction led to a sharp decline in U.S. bond yields and a significant drop in the U.S. market, with these losses spreading from the U.S. to the global market, exposing vulnerabilities elsewhere, especially in Japan. Concerns about the exacerbation of financial and economic fragmentation risks even led some to call for emergency rate cuts between the two meetings. I am not advocating for the Federal Reserve to pursue radical transparency. In certain areas, such as the quarterly forecast "dot plot," the Federal Reserve may have gone too far. Nevertheless, the Federal Reserve can and should be more open about policy decisions that affect all of us