Philip N Jefferson: Communicating about monetary policy
Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal
Reserve System, at "Central Bank Communications: Theory and Practice", a
conference hosted by the Federal Reserve Bank of Cleveland, Cleveland, Ohio, 13 May
2024.
* * *
Introduction
Thank you, Ed, for the kind introduction and for the opportunity to speak.1
You and the organizers of this conference have put together an excellent program on a
very important topic, central bank communication, which is key for effective
transmission of monetary policy to the economy. To fulfill our dual mandate of
promoting maximum employment and price stability, it is vital that we make good
monetary policy decisions and that we communicate those decisions to the public
effectively.
Today, I'll do three things. First, I'll discuss the channels that the Federal Reserve
currently relies on in its communications with the public. Second, I'll offer a few
historical examples of how economic thinking on monetary policy communication has
evolved over time. Along the way, I'll highlight how President Mester has contributed to
this evolution. And, finally, I'll share some thoughts on the communication challenges
that policymakers face.
Current Federal Reserve Communication Channels
Currently, Fed policymakers communicate often. The Fed publishes a statement after
every Federal Open Market Committee (FOMC) meeting, FOMC minutes three weeks
following each meeting, a Summary of Economic Projections (SEP) four times a year,
and monetary policy, financial stability, and supervision and regulation reports twice a
year. The Chair holds a press conference after every FOMC meeting and testifies in
front of Congress on the Monetary Policy Report twice a year. Other written
communications from the Board and the 12 Federal Reserve Banks, as well as
policymakers' speeches, interviews, and other appearances, help inform the public
about the Fed's goals and its strategies to achieve those goals.
Communication isn't only about talking, it's about listening also. Listening is reflected in
our activities. In addition to listening to the steady beat of economic data, the Board and
the Reserve Banks conduct numerous surveys of financial market participants,
businesses, and families. Some of what we hear is summarized in the Beige Book
published eight times a year. And the Fed has many forms of community outreach,
including Fed Listens events where Fed policymakers go into local communities to hear
directly from people living and working there. Alternatively, sometimes representatives
from communities come to us. For example, earlier this year, I heard from a rancher, a
manufacturing consultant, and the head of a nursing school at one of these events.
Today, it's widely accepted that clear communication contributes greatly to the effective
transmission of monetary policy, especially because clear communication can affect the
expected path of interest rates and financial conditions more generally. Loretta, in one
of her speeches, describes very well the role of central bank communication: "The
public will have a better understanding of monetary policy when policymakers are clear
about their policy goals, those aspects of the economy monetary policy can and can't
influence, and the economic information that influences their forecasts and policy
decisions" (Mester, 2018).
She went on to explain that when policymakers are systematic in their policy responses
to changing economic conditions, the public will have a better idea of how the
Committee's monetary policy is likely to change in response to anticipated and
unanticipated economic developments. In particular, she noted: "With such knowledge,
households and firms can plan better; they can make better saving, borrowing,
investment, and employment decisions" (Mester, 2018).
The Evolution of Federal Reserve Communications
The view reflected in Loretta's words seems commonplace now, but it wasn't always so.
When Loretta joined the Federal Reserve Bank of Philadelphia in 1985, the FOMC
didn't disclose its interest rate decisions. It didn't even report that it had made a
decision. In 1981, Karl Brunner, the Swiss monetary economist, called central banking
an esoteric art and lamented central banks' "inherent impossibility to articulate its
insights in explicit and intelligible words and sentences" (Brunner, 1981). At the time,
central banking wisdom dictated that monetary policymakers should say as little as
possible. Some research of that vintage tried to rationalize this "secrecy" through the
notion that monetary policy would be particularly effective if it surprised markets.2
In the 1990s, central bank communication changed dramatically. In 1993, the Fed
started to publish FOMC meeting minutes in their current form, and in 1994, it began
releasing FOMC meeting transcripts with a five-year lag. In February 1994, the Fed
started to publish post-FOMC meeting statements following meetings at which there
was a change in the intended federal funds rate. In May 1999, the FOMC started to
publish statements after every meeting, even on occasions when there was no change
in policy. By then, the move toward greater transparency was fully embraced by
Chairman Greenspan, who had once prided himself on "mumbling with great
incoherence."3
There were two primary reasons for this change. First, it was thought that greater
transparency would demonstrate the Fed's accountability to the public and safeguard its
political independence. Second, there was a growing appreciation in the economics
profession that clarity about policy could improve macroeconomic outcomes.
Expectations became a focal point in academic and policy circles with the emergence of
New Keynesian models in the 1990s as a framework for monetary policy. In these
models, aligning the expectations of decisionmakers in the private sector with those of
4
policymakers produced superior economic outcomes. Mike Woodford, one of the
developers of the New Keynesian model, put it this way: "Not only do expectations
else
about policy matter, but . . . very little matters" (Woodford, 2005, p. 402).
Communicating a policy strategy and following through on it increased the credibility of
the central bank and, therefore, its ability to steer expectations and the economy. Clear
communication also helped stabilize the economy and keep inflation closer to target
because, when the Fed clearly articulated a reaction function, financial markets would
be able to anticipate the likely future course of monetary policy and help the central
bank do its work by affecting long-term rates and other asset prices.
During the tenure of Chairman Bernanke, there was another burst of innovation in the
way monetary policy was communicated. In 2007, the first SEP was published to
convey systematically the economic outlook of FOMC participants. In 2011, Chairman
Bernanke started holding press conferences after every other FOMC meeting. In 2012,
the Fed adopted an explicit inflation target of 2 percent and started publishing individual
FOMC participants' views on the appropriate future path of the federal funds rate, now
5
famously known as the "dot plot." During these years, Loretta, in her capacity as the
research director at the Federal Reserve Bank of Philadelphia, contributed to ongoing
work on communications, in collaboration with policymakers and Federal Reserve
Board staff.
Of course, this was an extraordinary time for monetary policy, as interest rates in most
advanced economies were close to zero following the Global Financial Crisis. The
FOMC employed forward guidance-explicit communication about the future path of the
policy rate-as a key tool to deal with the unprecedented situation. The research
community had found that such forward guidance could be very effective in the context
6
of the New Keynesian paradigm. When Loretta became president of the Federal
Reserve Bank of Cleveland in 2014, she supported the continued use of forward
guidance during these extraordinary times, in particular to communicate a
lower-forlonger policy that could provide accommodation in the presence of the effective lower
bound constraint. She also insisted that forward guidance could be used effectively
even in normal times as a means of clarifying the FOMC's reaction function.
Loretta, as a member of the FOMC subcommittee on communications, developed and
advocated for several proposals to improve communications. One proposal was to
publish a measure of uncertainty surrounding the SEP forecast numbers. She was
concerned that uncertainty could be underestimated by the public if it wasn't
communicated. The proposal was adopted, and "fan" charts showing uncertainty
associated with the median projections have been a feature of the SEP materials since
2017. Progress toward greater transparency and more effective communication has
since continued. For example, since 2019 Chair Powell has been holding a press
conference after every FOMC meeting.
Researchers at academic and policy institutions have made advances in recent years in
measuring the effectiveness of central bank communication. For example, several
researchers are now using natural language processing techniques to analyze the
impact of central bank communications-including statements, press conferences,
7
speeches, and minutes-on asset prices and economic outcomes. Another
development is the identification of the effect that Federal Reserve policy
communications may have on asset prices using high-frequency financial market data.
This empirical strategy has allowed researchers to establish new facts. For example,
some economists have found that policymaker speeches affect asset prices as much as
the information released via FOMC statements and press conferences, and the effects
that central bank communications have on asset prices can differ, depending on
whether the communication conveys news about the policy rate path or about the
economic outlook.8
Communication Challenges Facing Policymakers
As my brief retelling indicates, we have come a long way. Over the past 30 years, the
Fed and many other central banks have embraced transparency and deliberately used
their communications as a policy tool. And researchers keep developing better methods
to measure and evaluate our communications.
At this point, you may be wondering how much longer I am going to talk. And that
question leads me to the following one, which is salient for my topic today: Are there
limits to the benefits of communication?
Surely, sometimes central bank communications can have unintended consequences.
Let me give you two examples. First, there is always a risk that policymakers'
statements about their economic outlook or their expected future path of the policy rate
are interpreted by the public with a false sense of certainty. For example, a
datadependent forward-guidance announcement can be mistaken for a commitment to a
fixed path of interest rates. When that interpretation is proven wrong down the road, it
can create more volatility and uncertainty than if there had been no announcement.
That is why policymakers always make sure to stress the data dependence of future
policy decisions. Second, it's also possible that the public misinterprets the views of
individual policymakers as a Committee view. The potential for misinterpretation is
especially acute when many policymakers speak at the same time and disagree with
9
each other. The diversity of viewpoints among policymakers lends itself to stimulating
debates and, ultimately, better policy. But in such a situation, more communication
could increase rather than reduce uncertainty about our policies.
I think we stand to benefit a lot from more research in this area. Important questions
include, how does the diversity of views among policymakers affect the effectiveness of
communications? And, more generally, what distinguishes effective from ineffective
central bank communication?
Conclusion
Let me conclude by repeating what I said at the beginning: To fulfill our dual mandate of
promoting maximum employment and price stability, we need to formulate good policies
and to make sure that our policies are clearly understood. Doing so helps make
monetary policy more effective. Therefore, I encourage researchers to continue to
address important questions related to central bank communication. Finally, I
congratulate President Mester on her outstanding career in the Federal Reserve
System and wish her the best of luck in her new adventures.
Thank you.
References
Acosta, Miguel (2023). "A New Measure of Central Bank Transparency and Implications
International Journal of Central Banking
for the Effectiveness of Monetary Policy," , vol.
19 (August), pp. 49-97.
Adam, Klaus, and Roberto M. Billi (2006). "Optimal Monetary Policy under Commitment
Journal of Money, Credit and Banking,
with a Zero Bound on Nominal Interest Rates,"
vol. 38 (October), pp. 1877-905.
Brunner, Karl (1981). "The Art of Central Banking," Center for Research in Government
Policy and Business, University of Rochester, Working Paper GPB 81-6.
Cukierman, Alex, and Allan H. Meltzer (1986). "A Theory of Ambiguity, Credibility, and
Inflation under Discretion and Asymmetric Information," Econometrica, vol. 54
(September), pp. 1099-128.
Eggertsson, Gauti B., and Michael Woodford (2003). "The Zero Bound on Interest
Rates and Optimal Monetary Policy (PDF) ," Brookings Papers on Economic Activity, no.
1, pp. 139-211.
Ehrmann, Michael, and Alena Wabitsch (2022). "Central Bank Communication with
NonExperts-A Road to Nowhere?" Journal of Monetary Economics, vol. 127 (April), pp. 69-
85.
Gardner, Ben, Chiara Scotti, and Clara Vega (2022). "Words Speak as Loudly as
Actions: Central Bank Communication and the Response of Equity Prices to
Macroeconomic Announcements," Journal of Econometrics, vol. 231 (December), pp.
387-409.
Goodfriend, Marvin (1986). "Monetary Mystique: Secrecy and Central Banking," Journal
of Monetary Economics, vol. 17 (January), pp. 63-92.
Jarociski, Marek, and Peter Karadi (2020). "Deconstructing Monetary Policy
SurprisesThe Role of Information Shocks," American Economic Journal: Macroeconomics , vol.
12 (April), pp. 1-43.
Lindsey, David E. (2003). "A Modern History of FOMC Communication: 1975-2002
(PDF)," Memorandum, Board of Governors Federal Reserve System, Division of
Monetary Affairs.
Mester, Loretta J. (2018). "The Federal Reserve and Monetary Policy Communications
," speech delivered at the Tangri Lecture at Rutgers University, New Brunswick, New
Jersey, January 17.
Orphanides, Athanasios, and John Williams (2005). "Imperfect Knowledge, Inflation
Expectations, and Monetary Policy," in Ben Bernanke and Michael Woodford, eds., The
Inflation-Targeting Debate. Chicago: University of Chicago Press, pp. 201-46.
Swanson, Eric T. (2023). "The Importance of Fed Chair Speeches as a Monetary Policy
Tool," AEA Papers and Proceedings, vol. 113 (May), pp. 394-400.
Vissing-Jorgensen, Annette (2019). "Central Banking with Many Voices: The
Communications Arms Race," paper presented at the 23rd Annual Conference of the
Central Bank of Chile.
Woodford, Michael (2005). "Central Bank Communication and Policy Effectiveness
The Greenspan Era: Lessons for the Future,
(PDF) ," in proceedings of a symposium
sponsored by the Federal Reserve Bank of Kansas City, held in Jackson Hole, Wyo.,
Aug. 25-27. Kansas City: Federal Reserve Bank of Kansas City, pp. 399-474.
1
The views expressed here are my own and are not necessarily those of my
colleagues on the Federal Reserve Board or the Federal Open Market Committee.
2
See, for example, Goodfriend (1986) and Cukierman and Meltzer (1986).
3
Lindsey (2003) provides an extensive account of the history of FOMC
communications from 1975 to 2002.
4
See Orphanides and Williams (2005), among many others.
5
The document containing the 2 percent inflation target, named the "Statement on
Longer-Run Goals and Monetary Policy Strategy," also clarified that the Committee
would not set a quantitative target for maximum employment and stated that the
Committee would follow a "balanced approach" in promoting both sides of the dual
mandate.
6
Notable early studies include Eggertsson and Woodford (2003) and Adam and Billi
(2006).
7
Some recent contributions include Acosta (2023), Gardner and others (2022), and
Ehrmann and Wabitsch (2022).
8
See Swanson (2023) and Jarocinski and Karadi (2020).
9
This "cacophony problem" could be severe if policymakers actively tried to sway
market expectations to align with their personal views (Vissing-Jorgensen, 2019).