When central banks communicate with the general public, it enhances trust and anchors inflation expectations, a
As the Federal Reserve attempts to
“I'd like to see the Fed join the club, so to speak,” Blinder said. “It's only a slight exaggeration to say the Fed has made no efforts to communicate with the general public.”
Other central banks have devised novel ways of reaching the average consumer, the paper notes. The Bank of England has adopted a tiered communication approach, conveying all information in three channels: one for financial experts, one for novices and one for laypersons. The European Central Bank has similarly made reaching the general public a priority.
Smaller central banks have employed still more creative ways to get their message across. The Bank of Jamaica, for example, regularly explains its functions and policy actions through songs and music videos.
Amid the innovation elsewhere in the world, the Fed has fallen behind, Blinder said, potentially to its own detriment. Fewer than
Blinder noted that the Fed has held listening tours for new policy proposals and used traditional media — interviews in newspapers and on television broadcasts — to speak directly to the public during times of distress. He also said, given the high level of uncertainty facing the global economy, the institution has done a good job of conveying where it stands to expert audiences through press conferences and speeches. But he would like to see similar efforts made to reach average citizens.
“The Federal Reserve is a public institution accountable to the public and you can't be accountable to the public if the public doesn't have a clue what you're doing,” Blinder said. “It would be better for the central bank and for society if they at least made some effort in that regard.”
Not all are convinced that a more talkative central bank is a net positive. Some Fed watchers and policy analysts believe more communication could lead to more issues when Fed projections miss the mark.
“The better they explain their role and clarify their objectives, the more they end up missing their goals and looking silly, so they are loath to go this route,” said Norbert Michel, director of the Monetary and Financial Alternative Center at the conservative Cato Institute.
Others worry a direct line to the general public could make the Fed more powerful and less accountable than it already is.
Karen Petrou, co-founder and managing partner of Federal Financial Analytics, said financial markets are already so transfixed with the Fed’s actions and move in such lockstep with them that it is difficult for the Fed to get an accurate read of the economic landscape.
While she is skeptical that average citizens would ever become so focused on the Fed, Petrou said she would be concerned about the central bank gaining any more influence than it already has.
“Traders are now moving on just one half wink from a regional Reserve banker and real fundamentals seem to have far less to do with markets than Federal Reserve policy, and that's not healthy,” she said. “No institution should have that much power because it's clearly never going to be that right.”
The NBER report finds that too much communication from the central bank can cause confusion, particularly if those speaking on its behalf present differing views. It also highlights more fundamental issues, including broadly held misconceptions about monetary policy. For instance, the paper notes, many Americans associate higher interest rates with higher future inflation, when the opposite is true.
“It’s the stagflationary view,” Blinder said. “That is, higher interest rates and higher inflation are both bad, so they go together.”
The paper notes that greater communication can help dispel some of these assumptions, but doing so must strike a careful balance of delivering the desired message without creating too much “noise” that distracts from the issue at hand.
Kathryn Judge, a professor at Columbia Law School who specializes in financial systems and regulation, cautioned against the Fed's pursuing “radical transparency,” arguing that it would ultimately dilute the institution’s most important messaging. However, she said the Fed does need to do a better job of communicating its purpose in an era of deep skepticism about administrative agencies.
Judge said both the general public and the judiciary branch have adopted an adversarial view of regulators in recent years. She cited the
“The effort to communicate directly is not just a way of enhancing the efficacy of monetary policy,” she said. “It’s helping people to understand who they are, what they do, how they're trying to serve their dual mandate of promoting full employment and price stability and the challenges they're facing. And it's against a background of a greater distrust for technocrats, greater concerns about agency independence, not just central bank independence.”
Kaleb Nygaard, a research associate with Yale University’s Financial Stability Program and former analyst at the Chicago Fed, said the Fed board in Washington could take simple steps to improve its outreach, such as having the chair participate in regular morning show appearances and other media interviews, or putting out multiple versions of policy statements in the same vein as the Bank of England.
With an upcoming internal policy review, Nygaard said the Fed will have the opportunity to revise its communication practices. He encouraged the central bank to be open to trying new things, even on a short term basis.
“Sometimes the Fed worries that if it starts something it has to continue it forever — see the headache that is the dot plot — but it should be more willing to experiment,” he said.
