WASHINGTON, April 11 (Reuters Breakingviews) - Investors hang on central bankers’ every word, hoping to gain an edge for their next trade. Policymakers such as Federal Reserve Chair Jerome Powell have used public statements to explain and compound the effects of their decisions. But with markets agitated, banks under stress and the economy on a knife-edge, rate-setters may find that silence is golden.
Every time a central banker opens their mouth, they take a gamble. If they say the right thing, officials can push people to revive an ailing economy or cool an overheating one. A verbal flub, though, can send shockwaves throughout the financial system.
Today, the risks outweigh the potential rewards. The failures of Silicon Valley Bank, Signature Bank and Credit Suisse have markets rattled. After jacking up rates to quell inflation, Powell and his colleagues in Europe, the UK and, to a lesser extent, Japan face a dilemma: Tightening policy further threatens to freeze lending. But with consumer prices rising at the fastest pace in decades, central bankers can’t easily cut borrowing costs, either. As a result, investors’ bets on future interest rate movements are fluctuating more than usual, stoking uncertainty in assets ranging from government bonds to equities.
Perched uneasily on the monetary-policy tightrope, officials can save their breath and focus on the difficult task ahead.
Chatty central banks are a relatively new phenomenon. Until 1994, the U.S. Federal Reserve wouldn’t even announce its actions after a policy meeting, and instead relied on investors to notice changes in markets the next morning. Former Fed Chair Alan Greenspan epitomized the central bank’s mute era, saying in 1987 that, since helming the Fed, he had learned to “mumble with great incoherence.”
His successors, and their peers abroad, have since turned communication into a valuable tool. The Fed adopted so-called forward guidance in 2003, previewing to the public that it would hold interest rates at low levels “for a considerable period.” The simple statement aided their policy of ultra-low borrowing costs and helped revive economic growth. The European Central Bank started using forward guidance in 2013.
Yet central banks’ loquaciousness has had its pitfalls. A so-called “taper tantrum” rocked markets in June 2013 after then-Fed Chair Ben Bernanke said policymakers would eventually cut down on emergency purchases of government bonds. The Chicago Board Options Exchange’s VIX index (.VIX), a common measure of market volatility, rose as much as 48% in the weeks after Bernanke’s comments, before easing. The Fed ended up delaying its tapering plans in September 2013 and only started shrinking purchases the following January.
Former Bank of England Governor Mark Carney sparked a similar, albeit less troubling, reaction in 2014 when he suggested the body would raise rates sooner than investors expected. The BoE’s perceived shakiness on the timing of the rate rises led one British Parliamentarian to liken Carney to “an unreliable boyfriend.” The central bank ended up holding rates steady, and then cutting them in 2016.
The most famous incident in recent history comes from the Fed and its 180-degree turn on inflation. Powell initially described pandemic-era price hikes as “transitory” in March 2021, arguing temporary inflation pressures would eventually fade. By the time Powell retired the term in June of that year, the Consumer Price Index was climbing at an annual rate of 6.9%. The late pivot played a part in letting inflation reach four-decade highs and dented the Fed’s credibility with the public. Just 43% of adults said they were confident in Powell’s leadership in 2022, down from 55% the year prior, according to a Gallup poll conducted in May.
Therein lies the problem with monetary policy chatter. When the economy is predictable, central bank communication can supplement its other policy tools. Yet periods of uncertainty can leave officials tying their own hands.
Investors are also more sensitive to central banks today than in years past. While U.S. stock prices are generally more volatile during Fed press conferences, the market has been much more frenetic during Powell-led conferences than those hosted by predecessors Janet Yellen and Ben Bernanke, according to a study published by the Centre for Economic Policy Research in March. After seven of the eight Fed pressers to take place in the last 12 months, the S&P 500 Index (.SPX) of leading U.S. stocks closed at least 1% higher or lower.
Central banks have at least partially acknowledged the dangers of overcommunication. Powell effectively locked forward guidance back in the Fed’s toolbox in June, saying policymakers will make decisions based on the latest economic data instead of trying to forecast next moves. The ECB followed in July, saying a “meeting-by-meeting approach” better suited the unclear outlook.
Not every policymaker has embraced the shift. Austrian central bank governor Robert Holzmann, an inflation hard-liner, irked some fellow ECB members in March when he called for officials to raise rates by another 200 basis points in 2023. Bank of Italy Governor Ignazio Visco, who favors a softer approach to price rises, reprimanded his peer soon after, flatly saying he didn’t “appreciate comments by my colleagues” on future policy.
To be sure, communication is still a powerful tool for rate-setters and can sometimes be just as impactful as interest rate adjustments. Mario Draghi’s 2012 speech declaring the ECB will do “whatever it takes” to preserve the euro marked a turnaround for the region’s debt crisis. Former Fed Chair Yellen said in a 2013 speech that communication now plays a “vital role” in controlling inflation and boosting employment. And considering Powell was the one to double the number of yearly Fed press conferences to eight in 2018, the central bank will probably keep on talking. As recently as early March, Powell stressed to U.S. lawmakers that “clear and transparent” communication is a key goal for the Fed.
Still, being more careful about what’s said, and how it’s said, could help central banks better balance their priorities. One option would be to extend so-called blackout periods, in which officials refrain from making public remarks ahead of policy meetings. Such a measure might tamp down on the volatility that typically follows central bankers’ speeches. And in times of greater uncertainty, policymakers could also unite around a single position to share during media appearances. It may suppress some dissent, but a sense of harmony can ease financial stability concerns and protect against public spats like the one within the ECB last month.
When central bankers hit the right notes, they can set the tone for an economic boom. Yet doing so today is fraught with risk. A return to previous central bankers’ incoherent mumblings would be unwise. A more tactful communications strategy, however, could buy officials precious wiggle room for setting policy at a particularly delicate time.
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CONTEXT NEWS
Many of the world’s most powerful central bankers are meeting this week in Washington at the International Monetary Fund and World Bank’s spring meetings to discuss policy, the economic outlook and the global fight against inflation.
