Last week, we tackled a common question about central bank communications and our process: if central bankers purposefully speak in cryptic language, how can a program be expected to interpret it?
Our answer: Fedspeak is a thing of the past; transparency has taken its place.
Interestingly–within days of our post–former Fed Chair Ben Bernanke also took on Fed-watching and transparency in his latest contribution to Business Insider.* We loved the piece–and so we decided to write up our top 4 takeaways:
1. The Fed is continually seeking to be transparent: “For democratic legitimacy and accountability,” Bernanke writes, “the Fed needs to be transparent about how it makes monetary policy decisions.” Like we discussed last Tuesday, transparency is integral to the Fed’s strategy–and Bernanke’s emphasis on its importance only supports that contention. What he is also gesturing towards here–that we haven’t spent much time discussing on our blog–is the complexity of the reasoning behind this shift in approach.
The history of the Fed is, in large part, a story of independence. For decades in the middle of the 20th century, the Fed struggled to break free of the control of the Executive branch. It eventually was able to gain its freedom, but over time it became clear that liberty came with a price: transparency. So, when Bernanke writes that “transparency” is necessary for “accountability,” it is, in part, a nod to the institution’s struggle for independence and the strategy of open communication that has since secured it.
2. The diversity of opinion coming from the Fed can be confusing: “The chair consequently has little or no ability to orchestrate what FOMC participants say, even if she were inclined to do so. When I was chair, I sometimes got advance copies of participants’ speeches as a courtesy; but my approval was not necessary or expected. What you hear from the Fed is policymakers’ unfiltered, unorchestrated opinions!” As Bernanke notes, the members of the Board and the region bank presidents represent “to a substantial extent, independent policymakers,” which means that keeping track of all these voices is important…and challenging.
It is, to a certain degree, because of the daunting nature of this task that we developed an automated system to collected, condense, and interpret the plurality of perspectives that flow from the Fed.
3. Policy is a public dialogue: “the open airing of policymakers’ opinions and analysis actively engages the public in debates about critical issues.” Monetary policy isn’t just decided by a select few. The modern Fed is using transparency to invite the public into this process. The Fed allows for such a diversity of public expression within its ranks not to confuse onlookers, but to give them a window into the monetary policy process and to ask them to participate. As Bernanke points out, “Fed policymakers are certainly aware of and not infrequently influenced by outside analysts.”
4. You should be listening to everything coming from the Fed. While Bernanke recommends that those with “limited time” should consult the “post-meeting statement and the chair’s commentary on behalf of the Committee” to get a general handle on developments shifts in monetary policy, the entire thrust of this article (hence the title) is the importance of all of the Fed’s communications.
This is another reason why we built Prattle’s algorithm: keeping track of all the material the Fed publishes is very, very difficult for anything other than a machine, and so our founders decided to create a program capable of providing an accurate, real-time, and comprehensive picture of the Fed’s mood. In order to guarantee comprehensiveness, our system factors everything the Fed publishes into its scores.
Bernanke’s article gives an excellent snapshot of how the modern, transparent Fed operates–and how Fed-watching should approach it. We only gave a brief treatment here, but, if you’d like to learn more, Prattle’s founders Evan Schnidman and William MacMillan wrote a book on these topics, How the Fed Moves Markets, on shelves December 3rd.
(Ben Bernanke; by Medill DC)
* Ben Bernanke is now an Economist at the Brookings Institution.