His first post-meeting conference will reveal whether restraint calms markets or leaves investors guessing. The answer could reshape Fed communication and market volatility.
Kevin Warsh took the helm of the Federal Reserve System and pledged to speak less – at a time when most central banks are trying to be more expansive in their statements. His first post-meeting press conference on Wednesday will be an early test of whether restraint can prove advantageous.
Central bank communication can have a significant impact on the behavior of businesses and households – almost as much as rate decisions. The Fed’s own policy on communications cites ‘substantial evidence’ that transparency and public messaging improve the effectiveness of monetary policy, helping citizens make more informed decisions.
Effective communication is extremely important today. First, it can help anchor inflation expectations, which after price shocks that began during the COVID-19 pandemic and in light of the strained relations between the United States and Iran, may remain volatile.
Overall, rising uncertainty due to geopolitics and the AI-driven revolution means that monetary policymakers should not stay opaque – their tools are already constrained, and clarifications help preserve policy effectiveness.
There is also a prudent argument in favor of greater caution in speech: sometimes fewer words can prevent misunderstanding and prevent excessive market reactions to weak signals.
The rise in communications after the 2007–2009 financial crisis is often explained by a desire to increase transparency and accountability. Some argue that diversity of thought should be the answer to groupthink, but it can undermine clarity of messages.
TOO MUCH GOOD?
The Bank of England has nine members on its Monetary Policy Committee, among which four are external, and all of them must publicly reaffirm their independence and explain their views in the published minutes of each meeting.
Similarly, the Governing Council of the European Central Bank consists of a six-member Executive Board and 21 governors of national central banks, who have a mandate to speak on policy.
While such a system provides accountability and transparency, it also creates a fair amount of ‘noise’ from influential officials who are not elected by the people.
And both the ECB and BoE have introduced scenario projections – base and more extreme scenarios. This gives investors more tools to assess the policy direction, but it can confuse companies and the broader public.
And the Fed’s ‘dot plot’ – a graphical representation of participants’ forecasts for future interest rates – has been criticized for being perceived as official guidance, while it is in fact merely a snapshot of views at a given moment. One possible step for Warsh could be to abandon this instrument.
Not everyone agrees with his views. Many politicians, businesspeople, and citizens may struggle to navigate the constant stream of policy messages, but most professional investors and economists understand this well and do not support trimming it.
A recent Brookings Institution poll showed that nearly all experts consider the Fed’s post-meeting press conference to be useful or extremely useful, and most also rate the dot plot highly.
Reducing the amount of messaging could lower the risk of excessive market reactions, but if it leaves investors with fewer benchmarks, volatility could rise.
QUALITY, NOT QUANTITY
How are central banks trying to make communication more understandable? The BoE has introduced a ‘multilayer’ approach aimed at different audiences with varying levels of complexity, while the ECB and other players use graphics, videos, and social media, not just formal speeches and interviews with the financial press.
The BoE also approached Warsh in 2014 to make operations more transparent. His reforms reduced the number of meetings from 12 to eight per year and introduced other changes.
There are debates about how successful that attempt to make communication clearer was.
Although the toolkit has become more complex – including QE and QT, balance sheet management, and forward guidance – it does not mean that the push for clarity should stop being a priority, especially given potential risks to independence from policymakers.
For example, Warsh could face pressure from President Donald Trump to cut rates even if inflation runs above target. A communication vacuum would be filled by other voices.
In the end, the answer may be simple: the quality of communication matters, not its quantity.
The Bank of England’s recently updated review finds that plain language, minimal jargon, and a focus on a few key messages improve understanding among the public and help build trust in the central bank.
If restraint reduces uncertainty for businesses and households about policy direction during periods of high volatility, Warsh may be right. But that is a big “if”.
Almost everyone considered the Fed’s post-meeting press conference useful or extremely useful, and most expressed the same about the dot plot
– Brookings Institution
The author of this analysis is Mike Peacock.