Central Bank Transparency

Excellent time at the Central Bank Research Association (CEBRA), including a presentation of my work with Martin Feldkircher studying central bank communication on expectations. There's a huge literature on CB communication already, but why is now such an important time to study it? Kevin Warsh is moving the Federal Reserve toward a more restrained communications regime: less forward guidance, fewer promises about the future, and a sharper focus on price stability. That makes the remaining communication more important, because households do not respond only to policy decisions; they respond to how those decisions are explained. In a paper with Martin, we link central bank speeches from 29 countries to individual level data from the Gallup World Poll from 2006 to 2023. This is hugely valuable *global* micro-data. The main question is simple: does the language of monetary policy affect how people perceive the economy? The answer is yes. Longer and more syntactically complex central bank speeches are associated with lower economic confidence, worse assessments of the national economy, and less favorable views of the job climate. The result is not only about whether central bankers sound positive or negative. Tone matters, but clarity matters at least as much. Positive sentiment in policy relevant sentences is associated with more optimistic household views. But when communication becomes harder to process, households appear less confident about the economy. The effects are stronger among younger and college educated respondents. They may simply be more attentive to central bank communication and more likely to process the signal directly or through media coverage. We also use Google Trends to study attention around speech dates. Search activity shifts toward terms like inflation and unemployment around central bank communication. That suggests households and the media are trying to interpret what central bank language means for prices, jobs, and the broader economy. So here's why the current Fed debate becomes relevant. If the Warsh Fed moves away from heavy forward guidance, the institution may speak less about future policy paths. But less guidance does not mean less need for clarity. A central bank that wants markets and households to react to data still has to explain its reaction function in language people can understand. The point is not that every central bank speech should be simplified into slogans. Monetary policy is technical, uncertainty is real, and credibility requires precision. But complexity has a cost. If central banks want communication to support expectations, trust, and policy transmission, they need to treat clarity as part of the instrument itself. Words matter in part because expectations matter. PS, thanks to the beautiful University of Copenhagen (Københavns Universitet) for hosting too. #MonetaryPolicy #FederalReserve #CentralBanking #EconomicExpectations #Gallup

I am closing out another week with a piece reflecting on all the Fedspeak and communication policy. The progress from the Volcker Fed to the Powell Fed in explaining itself to the public is immense, but with progress comes growing pains. The volume of Fedspeak now is painful. Communication and transparency are essential at the Fed. The Humphrey-Hawkins hearings and the accompanying Monetary Policy Report are important. Testifying regularly before Congress in public is essential to the Fed’s accountability. The press conferences after every FOMC meeting are also important. The Chair expands on the FOMC’s thinking and answers questions from journalists who write it up for regular people. The Chair channeling and explaining the FOMC is extremely helpful. On balance, the communication policy in the Powell Fed is a big step forward from the Volcker Fed. However, the current state of play threatens to undermine the Fed’s policy goals. Divergent views among Fed officials are healthy and to be expected; however, they have turned into a mess in public and do not inspire confidence. https://lnkd.in/e9Ub_dKm

Let me commend the Central Bank of Nigeria (CBN) for re-introducing the publication of key economic reports. When the apex bank abandoned this tradition in 2016, I was against it. You do not balance your bank account by asking for a thinner chequebook. So, there was just no reason why the CBN stopped those publications. Why? If you do not have the data, everything becomes a guesswork. But with data, you will even know what is working and not working. I commend the central bank for restoring this tradition. Now to the professors, analysts, citizens, etc, this is the moment we have been asking for: with the veil lifted, we can get insights on how the apex bank is thinking over things, and possibly, we can constructively offer suggestions. Study those reports, and test CBN policies on welfare gains and losses, assessing how projections turn out at the end of the policy implementations. CBN: there are many economics professors in our universities: task them to assist. In other words, do not make it wholly internal where only CBN workers will churn out the publications. We want a balanced viewpoint, devoid of any political agenda, and supported by data https://lnkd.in/ecSn6FNe

Three Questions the Fed Raised and Why Volatility Is Coming Market Espresso by Fabio Natalucci It is always difficult to implement changes in central banking. But the world is changing rapidly. #Geopolitics, the #AI capex boom and the need for #supplychain and #energy resilience point to inflationary pressures. A new #Fed chair provides an opportunity for a lean against the inertia present in the statement, communication and decision making. I focus on three takeaways from the June #FOMC meeting. (1) Reimagining Communication When the policy rate hit zero during the 2008 financial crisis, the Fed used forward guidance to push down borrowing costs for firms and households. But today the macroeconomic backdrop has changed. Forward guidance has been perceived by investors as a form of soft commitment by the Fed. In a world of persistent #inflation and heightened #uncertainty, anchoring markets to the committee's modal forecast is ineffective, if not counterproductive. But markets still need to understand how the Fed processes information when deciding whether to adjust its policy tools—the so-called reaction function. This is different from forward guidance. This kind of #transparency remains essential, and it does enhance #accountability to Congress and the public. (2) Five Task Forces and the Three That Matter Most First, communication is a priority. The median dot plots have become focal points for markets rather than tools for understanding policy. #Scenarioanalysis could incentivize investors to think through different outcomes, associated probabilities, and policy paths. Second, with inflation now 5 years above target, a reassessment of the inflation framework seems overdue, though the scope remains unclear. Third, the #balancesheet remains the least transparent piece of the Fed's toolkit. The central bank needs a clear framework covering objectives, size, composition, market footprint and the relationship to the short-term policy rate. With the U.S. #fiscaloutlook continuing to deteriorate, a discussion about the use of the balance sheet for #financialstability purposes (objectives, tools, communication) is crucial to maintain independence and avoid #financialrepression. (3) The Stealth Easing Question With inflation 5 years above the Fed 2% target after a series of #supplyshocks, a hawkish statement, and half of the committee projecting at least a rate hike this year, why did the Fed leave interest rates unchanged? The practical effect is a stealth easing of #monetarypolicy: steady nominal rates with rising inflation means falling real rates. #Financialconditions remain easy amid robust risk appetite. The Fed appears to be betting that productivity gains will offset inflationary pressures while growth remains strong. The lack of a clearly communicated reaction function sets the stage for more #volatility in coming months, so buckle up! https://lnkd.in/e86XumJm