ROI-Spiking central bank dissent risks stoking volatility: McGeever

Central bankers from Washington to Tokyo are increasingly divided over how to deal with the global energy crisis. Investors should expect less unity, more uncertainty and volatility in the months to come.

The policymakers' dilemma has become clear as Brent crude reaches $120 per barrel, which is double what it was at the beginning of the year. Should they increase interest rates to curb inflation or 'cut them to support the growth?

The preferred option seems to be a stance of waiting,?in the hope?that?the Iran war will end soon. The dissent is reaching a level not seen in years, mainly from policy hawks. As expected, the U.S. Federal Reserve maintained its federal funds rate at a range of 3.50 to 3.75% on Wednesday. Four policymakers disagreed with the majority, one wanting to lower rates and the other three wanting to remove the "easing bias" from the accompanying statements. This resulted in the 8-4 split - the most divided vote ever since 1992. The Bank of Japan had also held its key policy rate at 0.75 percent as expected the day before. Three officials voted for an increase, making the 6-3 vote 'the largest split in the board since 2016'.

This growing division will make it increasingly difficult to communicate a united message. This could send mixed signals to investors and businesses about the future of interest rates, which is exactly what they don't want right now.

CHAIR WARSH in a Minority?

Jerome Powell, in his final meeting as Fed chairman but not a member of the board, said that this division should not be a surprise.

Powell told reporters that it was only natural to have different views in the committee. Powell told reporters that the "extraordinarily challenging" set of supply-shocks we've had to deal with for the past five or six years is partly responsible.

He is right. He has a point.

The central bank faces a 'potentially knottier challenge, with a Fed chairman who may be at odds with the committee that sets rates. Kevin Warsh, a former governor of the Federal Reserve, is expected to replace Powell in the next month. This follows a year that saw unprecedented pressure from the White House on Powell and threats made against the institution.

Warsh said that Trump had not asked him to give any promises about policy, but Trump said that he'd be "disappointed," if Warsh didn't immediately vote to reduce rates.

Markets are not usually rocked by occasional dissents, but this could change if a new Fed chairman finds himself in a minority, particularly if rate decisions get closer.

Ryan Chahrour is a professor of economics from Cornell University. He says that this scenario, where Chair Warsh would be in the minority on interest rates, "would create waves on financial markets." "But Warsh is going to work hard to prevent this outcome."

This change of guard occurs at a time where the economic outlook has become particularly opaque, and when it is important to communicate clearly.

"HIDDEN DISSENT" More dissent in the Fed seems to?generate more volatility on the market. This is the conclusion of a study conducted by Kwok Tsang, at Virginia Tech, and Zichao Ying at the?Wenlan School of Business at Wuhan in?China.

Researchers customized a deep-learning model to measure "hidden dissent" in FOMC transcripts. This is "disagreement... that goes unobserved during formal votes."

The study found that "hidden dissension" has a significant impact on the market, increasing volatility and negatively impacting stock prices. It also increased bond yields, as well as perceived interest rate risks.

They wrote: "This confirms the fact that the way the committee makes a decision is important information to'market participants, beyond the policy stated or the general tone.

Investors will find it harder to predict the Fed's next moves if there is less consensus.

Other central banks may also be affected by this. Since Tuesday's split-decision, the currency, bond and equity markets in Japan have been weak. This suggests that BOJ's communications are not being heard clearly.

This study examined hidden dissent. What about the unconcealed, increasingly vocal divisions? We'll find out soon.

The opinions here are those expressed by Jamie McGeever a columnist at. Open Interest (ROI) is your new essential source of global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.

(source: Reuters)