Survey of academic and market observers gives high marks to Fed communications

June 10, 2020 FOMC Meeting:

A new Hutchins Center survey of Federal Reserve watchers in academia and the private sector finds a substantial improvement in their grades of the Fed’s communication efforts compared to a similar survey conducted in 2016.

Of the 46 respondents, 25 (54 percent) gave Fed communications an overall grade of A or A-. In the 2016 survey, only 4 of 58 respondents gave comparable ratings. The median grade for 20 Fed watchers who participated in both surveys went from a B in 2016 to an A-/B+ in the 2020. Respondents from academic institutions and think tanks generally gave the Fed higher marks than did those who work on Wall Street or in other financial institutions.

“When I began covering the Fed for the Wall Street Journal in 1987, the Fed didn’t even announce when it decided to move interest rates,” said David Wessel, director of the Hutchins Center. “Since then, the Fed has become increasingly transparent. While it can never satisfy those on Wall Street who want more certainty about future policy moves than any central bank can provide, our survey indicates both market and academic analysts find the Fed has grown easier to understand during the tenures of Janet Yellen and Jay Powell.”

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A detailed report of the survey, which was conducted by email in November 2020 and had a response rate of 19 percent, is posted here. Highlights include the following.

Which Fed communications avenues are most useful?

The survey found that the Fed chair’s press conferences following meetings of the Federal Open Market Committee and his speeches are the most useful of the Fed’s communications tools. More than 80 percent of the respondents rated them “useful” or “extremely useful.” The statement issued by the FOMC after each meeting, the Fed’s annual consensus statement of monetary policy principles, and its quarterly Survey of Economic Projections were rated “useful” or “extremely useful” by more than half the respondents.

In contrast, speeches by the presidents of the 12 regional Federal Reserve banks and the Fed’s semi-annual report to Congress were ranked least useful.

One survey respondent, Gregory Daco of Oxford Economics, said, “I would recommend fewer speeches by regional Fed presidents to limit the cacophony, especially in times of heightened monetary policy uncertainty.”

The FOMC dot plot, released as part of the Summary of Economic Projections, shows the forecasts of the future path of the federal funds rate from individual committee members (see Figure 2 here). The survey found that less than 50 percent of Fed watchers find the dot plot useful. Jonathan Wright of Johns Hopkins University warned that the dot plot will pose risks to Fed communication once interest rates near lift-off. “I would recommend eliminating the dot plots because whenever we are back to short-term interest rates being a live tool of monetary policy, it gives too much leverage to members with unusual views and also hurts the credibility of communications.”

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How do Fed watchers see the Fed’s new strategy statement?

In 2012, during Ben Bernanke’s chairmanship, the FOMC began issuing an annual Statement on Longer-Run Goals and Monetary Policy Strategy. The 2012 statement, for the first time, included an explicit inflation target: 2 percent. The FOMC revised the statement in August 2020. Among other things, the new version says that after a period when inflation has been persistently below its 2 percent target, the Fed will aim to achieve above 2 percent inflation for some time. It also says, in effect, that the Fed won’t tighten monetary policy when the unemployment rate falls near the level that economic models predict will lead to inflation but instead will allow unemployment to fall, as Fed Chair Jerome Powell put it, “without causing concern, unless accompanied by signs of unwanted increases in inflation or the emergence of other risks.”

The survey asked about communication surrounding the new monetary policy framework and its expected impact on the economy. Fed watchers were split on whether the FOMC has given enough detail on its new average inflation targeting framework in the Statement on Longer-Run Goals and Monetary Policy Strategy, speeches, and forward guidance in the FOMC policy statement. Of survey respondents, 43 percent indicated that the Fed has provided sufficient clarity for them to understand the monetary policy implications of the new framework.

When Powell announced the new statement, he said it “emphasizes that our actions to achieve both sides of our dual mandate will be most effective if longer-term inflation expectations remain well anchored at 2 percent.” Slightly more than half the Fed watchers in the survey indicated that the new statement will help anchor market inflation expectations at or above 2 percent; however, 80 percent believed there would be little change in public inflation expectations.

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How well do Fed watchers understand the Fed’s reaction function?

One purpose of the Fed’s public statements is to give financial markets, as well as households and businesses, a greater understanding of the Fed’s reaction function—how it will change monetary policy in response to a change in the economy, such as a decline in the unemployment rate or an increase in inflation. The survey finds that over 80 percent of Fed watchers are either “mostly clear” or “very clear” on the Fed’s reaction function.

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However, the survey found some Fed watchers still have doubts. J. Bradford DeLong of the University of California, Berkeley, expressed concern about the consistency of the FOMC’s messaging and reaction function: “They understand their reaction function sometimes, but not all the time. How am I supposed to do better?” Kenneth Kuttner of Williams College argued that, during a pandemic crisis, it is not realistic for the reaction function to be concrete or well understood. “I don’t think it’s possible to have a well-defined reaction function in a situation like this, without any antecedent or track record to go by.”

Tim Duy of the University of Oregon, a frequent blogger on monetary policy, suggested that more communication is needed to make the new policy framework as clear as possible. “Governors and the Chair should speak more, especially under the new policy strategy. The strategy as defined is fairly discretionary. The absence of clear guidelines surrounding the details of average inflation targeting means that we will need guidance of Fed speakers and the most important guidance comes from Governors and the Chair.”

Aneta Markowska of Jefferies warned that the Fed will need to give more guidance on the future of asset purchases. “We desperately need more guidance on QE, or else the rates market will likely experience a taper tantrum at some point in 2021. The FOMC has not communicated well (or at all) under what conditions it will consider tapering and ultimately stopping asset purchases.”

How do these results compare to the 2016 survey?

Fed watchers look more favorably on the quality of communication in 2020 than they did in 2016. The chart below compares the responses of the 20 respondents who took part in both iterations of the survey. The median grade for these 20 Fed watchers went from a B in 2016 to an A-/B+ in the 2020 survey.

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While the results suggest that the Fed has communicated clearly about its goals and priorities throughout its efforts to insulate the economy against the COVID-19 economic shock and in announcing its new average inflation targeting monetary policy framework, today’s message is perhaps easier to convey—rates are expected to stay low and policy accommodative for the foreseeable future—than in 2016, when the direction of policy was less certain.

How have the Fed’s communication practices changed over the years?

After each FOMC meeting, Fed watchers parse the policy statement for any changes in wording or content. Even this staple of monetary policy communication was not a part of the Fed’s communication strategy until February 1994. After issuing statements following meetings at which the committee agreed on monetary policy changes beginning in 1995, Fed Chair Alan Greenspan and the FOMC, in January 2000, adopted the current practice of releasing a statement after every meeting, even when there is no change in the stance of monetary policy. Under pressure from Congress, the Fed began releasing transcripts of FOMC meetings in 1994 with a five-year lag.

In this survey, Fed watchers found post-FOMC meeting press conferences to be the most useful channel for Fed communication. Before 2011, the press conference was used by the Fed chair only in very unusual circumstances.

In March 2011, Bernanke instituted a regular press conference after four out of the eight FOMC meetings each year, the ones that included quarterly updates to the Summary of Economic Projections. Powell began conducting press conferences after each FOMC meeting in January 2019.

Bernanke led the FOMC to publicly adopt an inflation target in 2012, adding to the transparency of the Fed’s goals and strategy for reaching them with the release of the original statement of longer-run goals and policy strategy. This statement was largely unchanged until a comprehensive review led to the update in August 2020.

To view the full report of survey questions and responses, click here.