The Federal Reserve shares far more information today than it did 25 years ago, and Fed Chairwoman Janet Yellen boasts that she runs “one of the most transparent central banks” in the world. But Fed watchers often complain that the Fed’s communications are inadequate or confusing. So in anticipation of its Nov. 30 conference, “Understanding Fedspeak,” the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution (where we both work) asked some of the main targets of Fed communications what they think the Fed does well—and not so well.
In a survey to which 58 longtime Fed watchers from academia and the private sector responded, we found that 60% gave Fed communications an overall grade of A or B. But four in 10 deemed the Fed’s communications unhelpful both to the overall economy and to financial markets. Only a third had a “very clear” or “mostly clear” grasp on the Fed’s reaction function, the way the Fed anticipates responding to changes in the economic outlook.
Of course, identifying the shortcomings of Fed communications is far easier than identifying workable solutions. Some Fed watchers seek far more certainty from the Fed than is possible given that the central bank has to adjust to unforeseen developments in the economy, and they demand more clarity than will ever be possible so long as monetary policy decisions are made with 19 people sitting around the table (the seven Washington-based governors and the 12 regional Fed bank presidents, when all positions are filled).
One solution popular among our respondents is that the Fed chairwoman should speak more often (51%) and regional Fed bank presidents should speak less (64%), an apparent reflection of the widespread belief that the chairwoman speaks for the consensus of the interest-rate-setting Federal Open Market Committee and that her views are a more important indicator of what the Fed is likely to do than any other policy maker’s.
As one respondent put it: “Everyone except the Chair, keep quiet. You are only giving conflicting signals.”
Said another: “Too many people spouting off their views in in-person interviews…Shut up the showboaters!”
When we asked respondents to rate the usefulness of 10 channels of Fed communications, they listed Fed bank president speeches near the bottom: Only 24% thought they were “extremely useful” or “useful.”
Given this desire to hear more from the chairwoman, it isn’t surprising that two of the three most useful channels of Fed communications, according to respondents, were her speeches (59% said they were “extremely useful” or “useful”) and her quarterly press conferences (54%). The other was the FOMC’s postmeeting statement (59%).
Fed watchers in academia tended to give the Fed higher grades than those in the markets and other private-sector institutions. One difference: Academics think the Fed’s current approach to communications is more helpful to the markets than those in the markets think it is. Some 73% of academics said Fed communications help the markets; only 44% of private-sector Fed watchers agreed.
The only major form of Fed communication that private-sector Fed watchers found more useful than the academics was the public projections of short-term interest rates that each of the 19 Fed policy makers gives quarterly, affectionately known as “the dots.” This suggests that market Fed watchers care more about precisely when and by how much the Fed will raise short-term rates. Academics, in contrast, put less weight on the dots and more on the Fed’s words. Overall, though, the dots didn’t find support in our survey. Roughly a third of respondents find them “extremely useful/useful,” slightly less than a third deem them “somewhat useful” and more than a third find them “not useful/useless.”
Fed officials often describe their communications with the public and the markets as “a work in progress.” Our survey suggests there’s room for improvement.