Fed's Jefferson flags challenges on communications front
By Michael S. Derby
(Reuters) - Federal Reserve Vice-chair Phillip Jefferson said Monday that while it is important for a central bank to communicate clearly with the public, there are times when those communications can get muddled.
“It’s widely accepted” that clear communications enhances how effective central bank policies are “because clear communication can affect the expected path of interest rates and financial conditions more generally,” Jefferson said in comments prepared for delivery before a conference held by the Federal Reserve Bank of Cleveland.
Jefferson did not comment on monetary policy or the economic outlook in his prepared remarks.
But sometimes attempts to communicate can have “unintended consequences,” Jefferson noted.
The Fed’s second-in-command pointed to two examples. “There is always a risk” that officials’ comments about the future of the economy and monetary policy are “interpreted by the public with a false sense of certainty” that can be mistaken for a fixed view on the outlook, Jefferson said.
“When that interpretation is proven wrong down the road, it can create more volatility and uncertainty than if there had been no announcement,” Jefferson said.
The public comments of officials can also muddy the waters, he said.
“The diversity of viewpoints among policymakers lends itself to stimulating debates and, ultimately, better policy,” Jefferson said, adding “but in such a situation, more communication could increase rather than reduce uncertainty about our policies.”
Jefferson’s take on central bank communications arrives as central bankers try to determine whether the sticky inflation seen over the start of the year will thwart their ability to deliver on forecasts from earlier in the year that penciled in three rate cuts for this year.
The quarterly Fed projections -- the next set will come at the June Federal Open Market Committee meeting -- are not an official forecast but merely a summation of the views of policy makers. However, many in markets do see them as a house view, and Fed officials are routinely asked to comment on those forecasts.
At the same time, Fed officials are frequent public speakers, and those speaking opportunities, which on some days can see multiple policy makers opining on the outlook, can leave market participants struggling to find a coherent take on what central bankers believe lies ahead.
A report last week from the Brookings Institution's Hutchins Center on Fiscal and Monetary Policy found academics and Fed watchers giving decent marks to the Fed for clear communications, although some aspects of that outreach, like the quarterly forecasts, were viewed with a more mixed take.
(This story has been refiled to correct typos in paragraphs 5 and 12)
(Reporting by Michael S. Derby; Editing by Chizu Nomiyama)
