- Key insight: The Federal Reserve is communicating its policies differently under newly installed Chair Kevin Warsh, and more reforms could be coming. Some see a review as a positive exercise, others worry it may go too far.
- Expert quote: "Markets, the public and the legislature need to understand how the Fed is doing things, why it's doing what it's doing, how it might react to incoming data. Being completely opaque on that is not a good idea, and it's not conducive to accountability." — Former Federal Reserve Vice Chair Don Kohn.
- Forward Look: Warsh is assembling a task force of policy experts to review the Fed's communications strategy. That group is expected to suggest reforms at the end of the year.
The Federal Reserve is rethinking its communications strategy and, if last week's monetary policy disclosures are any indication, its bias seems to be toward a less-is-more approach.
New Chair Kevin Warsh has criticized the Fed's glut of communications for years, and used his
"More than 30 years ago, the Fed was totally unreceptive to the argument that it should communicate coherently, and that has changed a lot over the [past] 30 years, and I would hate to think that we're going back to the bad old days," said former Fed Vice Chair Alan Blinder. "I don't know that we are. … We don't know nearly enough yet."
All facets of Fed communication will be up for review this year. Warsh said he is
Former Fed Vice Chair Don Kohn said the move to revamp the Federal Open Market Committee's communications policies is consistent with what Warsh has said for years — namely that the current approach has made financial markets too reliant on the Fed and made monetary policymakers slow to respond to changing economic conditions.
The challenge, Kohn said, is finding the right balance in its forward guidance — offering markets and the public enough information without giving away too much.
"Chairman Warsh is right — the Fed can be too clear, it can lock itself into a course of action too much, and that's not healthy. It's not healthy for the committee, it's not healthy for the markets. So, there's a balance there," Kohn said. "Markets, the public and the legislature need to understand how the Fed is doing things, why it's doing what it's doing, how it might react to incoming data. Being completely opaque on that is not a good idea and it's not conducive to accountability."
Warsh has argued that the Fed should be taking signals from financial markets, not the other way around. But this goes against a policy orthodoxy that has formed not only at the Fed but in central banks around the world.
In recent decades, Blinder said, central banks have used their communication tools to clue financial markets into policy changes as early as they can. The intent — and outcome — of this shift, he said, is more rational behavior by financial firms.
"It greatly diminishes the likelihood that markets will go off on flights of fancy, either by assuming the Fed funds rate is going way, way up or way, way down at times when the Fed doesn't have that in mind," Blinder said. "Warsh and many others admire the information processing of the markets, and I understand that, but there is one area in which the Fed has a huge informational advantage over the markets, and that is what's on the mind of the Fed now."
'Stripping it down'
Some tweaks have already been put into effect. After its meeting last week, the FOMC's suite of policy communications looked noticeably different than it did under former Chair Jerome Powell.
The committee's official policy statement was a lean 130 words, down from the usual 300-400 words. The summary of economic projections — the quarterly forecasts from all the participating FOMC members — was one contributor shy. Warsh abstained from the exercise, citing his long-running issue with the practice. Then there was the press conference, in which Warsh repeatedly declined to answer questions on the basis that he would not engage in "forward guidance."
Individually, the changes were minor. The statement still conveyed the target range for the federal funds rate and the committee's vote tally. The SEP still demonstrated where the group sees policy heading — namely, in a more restrictive direction than it projected in March. And the responses to reporters' questions, while more direct, were not terribly different from Powell's, which tended to focus on data-dependency and a desire for flexibility.
Former Federal Reserve Bank of Richmond President Jeffrey Lacker said the changes on display after last week's meeting were positive and long overdue. In particular, he noted that Warsh's arrival provided the FOMC an opportunity to make needed revisions to its policy statement.
"The change to the statement — stripping it down to the chassis, as it were — was a good move and this is a perfect juncture to do it," said Lacker, who was a member of the FOMC from 2004 to 2017. "The statement accumulates verbiage over time because you sit around the table and say 'If we take this out, how do we explain why?' Most of these are eternal truths, so how do you take them out? This was the perfect opportunity to cut out unneeded language."
After the meeting, Warsh said the statement was crafted to be "a bit shorter, a bit simpler" and to dispense with "some older language."
"That statement just gives you the facts as best we can judge it," he said. "Absent also is so-called forward guidance, which we believe was not well suited to the current policy conjuncture."
Forward guidance
The term forward guidance itself has taken on multiple meanings over the years. Originally, it was used to describe a very specific type of communication about the Fed's balance sheet.
During the recovery following the subprime mortgage crisis, the central bank wanted to stimulate economic activity, but because the lower range on the federal funds rate was already at 0%, the FOMC had to use nontraditional methods to ease policy. These included buying long-dated assets to lower interest rates further out on the yield curve and committing — through forward guidance — to continue doing so for the foreseeable future. The Fed has not engaged in this specific type of communication since 2022, when it stopped buying assets to aid in the post-pandemic recovery.
Warsh has been opposed to balance sheet expansion — known as quantitative easing, or QE — since his days as a governor on the Federal Reserve Board, a stance that goes hand-in-hand with an opposition to forward guidance about asset purchases. Yet, during his press conference, he demonstrated an aversion to disclosing any information about how the Fed might respond to future economic developments.
"We dropped forward guidance," Warsh said when asked to explain what increased inflation expectations among other FOMC members might mean for broader inflation expectations. "Somewhere along [the way], the committee, I think, dropped it … because they said, at this moment in time, it doesn't feel as though providing forward guidance is right. Others have, I'd say, different views, and think, as a general proposition, forward guidance isn't the business we should be in. But, that will be taken up by the task force on communications and my policymaker colleagues.
"We're going to listen hard to what the experts say and make our own decision," he added, "but I can't give any forward guidance about what we're going to do next."
Kohn said he does not see this approach being sustainable. While it is reasonable for Warsh to avoid prejudging future rate decisions, he said the public is still owed an explanation of how the committee arrived at its latest decision.
"[Warsh] talks a lot about Alan Greenspan, and Alan Greenspan always had a narrative: What's going on here? How do we look at it? What are the forces at work? What are we worried about now?" Kohn said. "I thought that was one of Greenspan's superpowers, telling a story and then figuring out when the story wasn't quite right anymore."
Greenspan,
"Since becoming a central banker, I have learned to mumble with great incoherence," the then-freshly anointed Fed chair is said to have quipped to the Senate Banking Committee in December 1987. "If I seem unduly clear to you, you must have misunderstood what I said."
The statement has become synonymous with "Fedspeak," a cryptic, heavily jargonized approach to communication in which the path of Fed policy can be discerned, but only by the sophisticated few. The ethos of the practice, it is said, was that monetary policymaking should be a technocratic process that is well guarded from the prying eyes of the public.
Just how relevant that particular quote is to monetary policy communication is unclear. The hearing it said to have originated from was about repealing the Glass-Steagall Act of 1933 — a proposition Greenspan supported, according to written testimony. There is no readily available video or transcript from that hearing, so the full context of the statement might be lost to time.
Still, the Fed's communication with the public was unquestionably more limited then than it is today. The FOMC did not officially announce its policy changes until 1994; before then, it was up to markets to detect changes based on trading activity by the system's trading desk in New York.
In this sense, Greenspan's quote about being "unduly clear" was a nod to an era of central bank communications that was nearing its end. Greenspan often shared his views with the public, albeit in terms that were not always accessible to the average citizen. The meeting statement from his tenure gave way to the SEP under his successor, Ben Bernanke, along with quarterly press conferences. Janet Yellen continued those practices, as did Powell, who began holding meetings after every FOMC meeting.
'The cacophony problem'
Recent years have also seen an uptick in opportunities for reserve bank presidents to share their individual views on the economy and monetary policy. While these officials have always had a platform for discussing conditions in their respective districts, the heightened attention of Fed communications have brought them national attention.
Lacker said reforms to the Fed's communication framework should not prohibit reserve bank presidents or other FOMC participants from voicing their opinions.
"It would be detrimental to the public's understanding of monetary policy to dampen the understanding of the diverse views within the committee," he said. "Diverse views are healthy and there's no reason the public can't separate the views of singular committee members from the policies of the group as a whole."
Others, meanwhile, say it would be wise for the Fed to take steps to reduce the noise that comes with so many different policymakers sharing their views. Blinder said disparate speeches and forecasts from all 19 FOMC participants can muddy the understanding of the Fed's policy rather than clarify it.
"What you'd like to minimize — to the extent you can — is different bank presidents hinting at different outcomes for the nation's monetary policy," Blinder said. "You're never going to be able to eradicate it 100%, unless everybody just goes mum, like in the bad old days, and I don't think that's what we should do. But if there's goodwill on the committee, there may be ways to reduce the cacophony problem."
