May 12, 2011
Lights, Camera, Action: Monetary Policy and Communication
By Cindy Ivanac-Lillig
The first post-FOMC presser with Bernanke, April 27, 2011:
As a perpetual student of the FOMC process, I have come to appreciate the importance of communication in policy making. It is probably -- dare I say -- equally as important as the economic analysis that goes on in the FOMC boardroom. Press releases and external communication by the parties involved move markets, set expectations, and almost immediately affect how investment monies are allocated worldwide. The recent addition of the press conference to the FOMC process is not only a nod to the commitment of transparency, but also, in my opinion, another good vehicle to ensure clear communication to market players.
The European Central Bank (ECB) recently put out a paper entitled, “Central Bank Communication on Financial Stability.” It looked at how central banks’ communications affect the stability of their respective financial systems. The study looked at the impact of a particular tool many central banks use, the financial stability report (FSR). The Fed does not use this tool and was therefore not part of the study. None the less, across the 37 central banks included, the paper finds that FSRs seemed to homogenize market expectations, somewhat increasing financial stability. The paper finds that governors’ speeches and interviews did not have this calming effect. Rather in the case of optimistic speeches, market volatility actually increased.
The paper is an interesting read and highlights the difficulty of designing communication strategies that promote transparency and financial stability. It will be interesting to see how the new Fed press conference is viewed by capital markets and whether or not this new communication tool acts to reduce or increase market noise.
What do you think?
Posted by Cindy at May 12, 2011 8:59 PM
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