Fed Vice Chairman Phillip Jefferson highlights communications challenges

Fed Vice Chairman Phillip Jefferson highlights communications challenges
Fed Vice Chairman Phillip Jefferson highlights communications challenges

Federal Reserve Vice Chairman Phillip Jefferson said Monday that while it is important for a central bank to communicate clearly with the public, sometimes those communications can be muddled.

It is widely believed that clear communication improves the effectiveness of central bank policies, because clear communication can affect the expected development of interest rates and financial conditions in general, Mr. Jefferson said in comments prepared for presentation at a conference hosted by the Federal Reserve Bank of Cleveland.

Mr. Jefferson did not comment on monetary policy or the economic outlook in his prepared comments.

But sometimes attempts at communication can have unintended consequences, Mr. Jefferson noted.

The central bank’s second-in-command cited two examples. There is always a risk that officials’ comments about the future of the economy and monetary policy will be interpreted by the public with a false sense of certainty that can be confused with a fixed view of the outlook, Mr. Jefferson.

When that interpretation later turns out to be wrong, it can create more volatility and uncertainty than if there had been no announcement, Mr. Jefferson said.

Public comments from officials can also muddy the waters.

The diversity of views among policymakers lends itself to stimulating debates and, ultimately, better policy, Jefferson said, adding that in such a situation, increased communication could increase uncertainty on our policies instead of reducing it.

Mr. Jefferson’s views on central bank reporting come as central banks attempt to determine whether stagnant inflation seen at the start of the year will thwart their ability to meet forecasts made earlier in the year, which forecast three rate cuts for this year.

The Fed’s quarterly projections – the next set will be presented at the June meeting of the Federal Open Market Committee – are not official forecasts, but simply a summary of policymakers’ views. However, many markets view them as an internal view, and Fed officials are regularly asked to comment on these forecasts.

At the same time, Fed officials often speak in public, and these speaking opportunities, which can sometimes see multiple policymakers speaking out about the outlook, can leave market participants unable to find a coherent view on what central bankers think the future will be.

According to a report released last week by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, academics and Fed watchers gave the Fed decent marks for the clarity of its communication, although some aspects of that communication, such as quarterly forecasts, were perceived in a more mixed way. (Reporting by Michael S. Derby; Editing by Chizu Nomiyama)

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