ROI-Spiking central bank dissent risks stoking volatility: McGeever

Central?bankers from Tokyo to Washington are increasingly divided about how to deal with the global energy crisis. Investors should prepare for more policy uncertainty in the months to come.

The dilemma for policymakers is obvious as Brent crude reaches $120 per barrel, double what it was at the beginning of the year. They must decide whether to 'raise interest rates in order to curb inflation or to cut them in order to support growth.

The "preferred" option appears to be waiting in 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. The vote of 6-3, with three officials voting for an increase, was 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 interest rate path - just what they need at this time.

CHAIR WARSH in a Minority?

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

Powell told reporters that it was "only natural" for the members of the committee to have different views. It's partly due to the extremely challenging supply shocks we've had for five or six years.

He is making a point. He has a point.

The?central? bank faces an even more difficult challenge now: a Fed chairman who may be at odds with its rate-setting committee. Kevin Warsh, a former governor of the Federal Reserve Bank, 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 dissent, 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 at Cornell University. He says that this scenario, where Chair Warsh takes a minority position on the interest rate issue, would cause 'waves' in the financial markets. Warsh will do everything possible to prevent this.

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 from the Fed seems to increase market volatility. This is the conclusion of a study conducted by Kwok Tsang, at Virginia Tech, and Zichao Yang, at Wenlan School of Business in Wuhan.

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

The study found that "hidden dissent" has a significant impact on the market, increasing volatility in the stock market, negatively impacting shares prices, and driving up bond yields and perceived risk of interest rates.

They wrote: "This confirms the fact that the way the committee makes a decision is important information for market participants, beyond the policy and 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 the BOJ's messages aren't being heard loudly.

This study examined hidden?dissent. What about the divisions that are more vocal and not hidden? Soon we'll find out.

The opinions here are those expressed by Jamie McGeever. A columnist for. 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)