There was a time, not so long ago, when the Federal Reserve said very little about its policies; its leaders did their utmost to obfuscate rather than clarify.
Those days are long gone. Today, we are flooded with “Fedspeak.” Last week alone, 11 top Fed officials made 20 speeches. No wonder there is mounting concern about the risk over-communication poses to the well-functioning of financial markets, the efficient allocation of resources in the economy, and the stability of the global system.
Appearing before a Congressional committee back in 1987, then-Chair Alan Greenspan famously said, “If I seem unduly clear to you, you must have misunderstood what I said.” I detailed in my 2016 book on central banks, The Only Game in Town, that this was part of what Greenspan called a “language of purposeful obfuscation.” It was regarded, to quote the economist Alan Blinder, as a “turgid dialect of English” that used “numerous and complicated words to convey little if any meaning.”
The Greenspan era is well behind us. In 2011, then-Chair Ben Bernanke initiated the practice of periodic press conferences to follow the statements issued at the end of Federal Open Market Committee meetings. Later, these became the norm for every policy meeting, supplemented by the quarterly publication of FOMC members’ individual forecasts, the release of minutes, a marked step-up in other communication, and an enlargement of the target audience. Fed chairs have appeared on 60 Minutes and been interviewed for personal profiles in wide-circulation periodicals.
This ample communication is underpinned by the view that transparency is essential for effective forward guidance, which helps the economy and markets transition more smoothly as policy shifts. It is also viewed as central to influencing a broader set of behaviors. Indeed, as the Financial Times remarked in a 2014 editorial, “monetary policy steers the economy through its effect on sentiment as much as any financial channel such as interest rates.”
Yet, though we are regularly on the receiving end of speeches from members of the Fed board and regional presidents, they have not served their purpose lately. Rather than facilitate orderly economic and financial transitions as they did earlier, the now-excessive communication has been contributing to undue market volatility.
There are growing calls for restraint from those worried that too much communication aggravates the risk of both market and economic accidents. Some see merit in doing away altogether with the “blue dots.” Others would like to reduce the frequency of press conferences and encourage fewer speeches.
The issue goes beyond the volume of Fed communication. It is also its nature.
Lacking a strategic anchor and an operational monetary policy framework, the Fed has become excessively data dependent, with officials often pushed to comment immediately on inherently volatile data releases in a manner that over-extrapolates their information content.
There is also the problem of multiple communication U-turns. Earlier this month, Chair Jerome Powell gave markets quite a shock by suddenly distancing himself for the optimism he had only recently expressed about the US experiencing favorable supply-side developments that enhance potential output and act as a counter to inflation. Such improvements may have run their course, he suggested in a Nov. 9 speech, adding that strong economic growth could warrant further tightening.