Learning to mumble with greater coherence
- Beliefs about the future conduct of monetary policy matter: they influence asset prices today and therefore the prospects of the central bank achieving its mandate in the future. However, the conduct of monetary policy is not well understood by market participants so there is a role for central bank communication to nudge those beliefs in the appropriate direction.
- Central banks have taken great strides in developing their communication strategies in recent decades towards a more transparent and comprehensive description of the policy debate but that process is not yet complete. We propose that policymakers publish an optimal plan, describing how they expect to adjust the policy stance in the future given their current assessment of the economy, which is placed within a fan chart to emphasise the uncertainty around that plan.
From myth and mystique to 24/7 guidance: a brief history of central bank communication
Once upon a time, central bankers were secretive souls. Very little was said in public about the conduct of monetary policy and as a result, policy decisions were more unpredictable. Alan Greenspan famously summed up the preference for opacity in his Congressional hearing in 1987:
‘Since I have become a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said’.
There are a number of reasons why previous generations of central bankers may have preferred to just act, rather than explain their thinking to market participants in advance. Central bankers may have worried about the practical considerations of disseminating market sensitive information about the future conduct of policy in an era when the formal channels of mass communication which current generations of investors take for granted were less well developed. However, it also appears that secrecy and opacity were seen as virtues. Many policymakers may have been motivated by reputational concerns. If a central bank is transparent about the thought process that guides its decision making, and that analysis turns out to be flawed then its competence might be called into question. Likewise, if the central bank publishes a plan for how it expects to set rates in the future but is unable to execute that plan on account of an unexpected turn of events then investors might cry foul – either complaining that they have been misled or that the central bank is not up to the job. Some policymakers also appear to have believed that ‘surprise’ policy decisions – i.e., those which were not expected by market participants – had a more significant impact on markets and the economy (perhaps because they were more likely to jolt sentiment), and therefore wise central bankers would always want to preserve the element of surprise.
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