Fedspeak has got a makeover and now means clear and transparent communications to guide financial markets
From a speaker to a listener – the way the Fed communicates has undergone a sea change. Not long ago, it used to be a monologue.
Richard Clarida, Vice-Chair, Federal Reserve Board (FRB), in a recent speech spoke of the ongoing review of the central bank’s Monetary Policy Strategy, Tools, and Communication Practices. It’s commonplace that central banks revisit their strategies and objectives periodically. The latest to change its strategy is the Reserve Bank of New Zealand which has added unemployment to its inflation-targeting framework.
The interesting part is this US review is being conducted as part of a series of events named as Fed Listens. The central bank will host events around the country in a town hall format "to hear perspectives from representatives of business and industry, labour leaders, community and economic development officials, academics, non-profit organisation executives, and others”.
That’s a clear shift because so far what central banks, especially the Fed, cared about was speaking and not listening. So much so, Fedspeak has become a term in itself, first coined by Alan Blinder, former vice-chairperson of FRB.
Blinder defined Fedspeak as “turgid dialect of English…which seems to connote the use of numerous and complicated words to convey little if any meaning”. He attributed this style to the Alan Greenspan era.
Consider this classic Fedspeak with the Greenspan touch: “And I think where the confusion arises is the fact that you cannot view monetary policy as a sort of simple issue of, if the most probable outcome is coming out of this soft patch into moderate growth with low inflation, which I think is the most probable outcome, that is not the same statement as saying that you therefore, in the process of implementing monetary policy or formulating it, I should say, completely disregard what the upsides and downsides of a potential outcome may be.”
Confused? This is precisely why the Fed is stepping in to clear the air.
Interestingly, the term Fedspeak was inspired by Newspeak used by George Orwell in his book 1984.
Over time, the nature of Fedspeak changed dramatically and turned almost 180 degrees. This change came about with Ben Bernanke joining the FRB first as a Governor and later as the Chairperson. He believed firmly that communication is an important tool in guiding market expectations. He gave several speeches highlighting the same and one of them was even titled Fedspeak (January 2004)!
Fedspeak now means clear and transparent communications to guide financial markets. Ever since, this approach of clear communications has been adopted by many central banks. You could call this ECBspeak, BoEspeak and even RBIspeak. The central banks have made quite a few innovations within this speak to increase transparency and clarity.
Coming back to Fed Listens, it has been prompted by the Global Financial Crisis of 2008. After the outbreak of the crisis, the central bank took several policy actions to stall the impact. The economy recovered, but Fed’s actions were criticised squarely by stakeholders across the spectrum.
This has led the central bank to not just review its strategy, but also hear out all possible stakeholders. It explains: “The review will include outreach to and consultation with a broad range of people and groups interested in the US economy. The Reserve Bank will hold a series of Fed Listens events around the country, with a town hall format, to hear perspectives from representatives of business and industry, labour leaders, community and economic development officials, academics, non-profit organisation executives, and others.”
It started the series with community listening session in Dallas in February, followed by events in Minneapolis and Chicago. The Fed team will prepare and compile all the discussions at these multiple places and use them for its ongoing review. It plans to release the findings during the first half of 2020.
In a way, the Federal Reserve is not alone in doing this. The central banks of England and Italy have been doing this outreach and most other central banks would admit they are doing something on these lines.
The RBI, too, engages with wide stakeholders while firming up its policy. New Governor Shaktikanta Das is often reported to be meeting various groups to understand the issues facing the Indian economy. The central bank also invites comments from the public for most of its policies.
What comes as a breath of fresh air is how the Fed is nudging us to think that it is trying to listen and not just speak. Moreover, speaking was mainly restricted to market participants whereas listening is much broader. The idea is to signal that the central bank is not just open to communicating beyond financial markets but also listening and incorporating views of others. This implies that Fed communications, which were deemed as a one way street not long ago, is becoming a two-way street.
Management literature also shows how best leaders are not just great speakers, but great listeners too who empower their teams to achieve their objectives. The Federal Reserve seems to have taken a leaf out of that book. Given that it is the de facto leader of central banks, Fed Listens is a welcome change and others should follow suit.
This change will also be welcome by ornithologists! The central bankers are often categorised as doves, hawks, owls and so on based on their “nature of speak”. This analogy is flawed as birds are first great listeners and then speakers as they rely on listening skills to keep off threats.(The author teaches economics at Ahmadabad University. Views are personal.)