Report on

Central bank communication with the public

By Group 1.8

6448011729 Kemmapong Leelawadee

6448007229 Kittisak Subroungtong

6448008929 Kulchat Harnchanpanich

6448021029 Jettanut Aimwatcharamarch

6448012329 Khanh Gia Bao Nguyen

6448110129 Mayuri Burapha

Submitted to

Assoc. Prof. Chantal Herberholz, Ph.D.

Course Instructor

November 17, 2022,

2952341- Economics of Money and Financial Markets

Academic Year 2022

Bachelor of Arts in Economics (EBA)

Faculty of Economics, Chulalongkorn University

 Abstract

Central banks regularly give inflation estimates that may, in principle, communicate their
reaction function indirectly. A spotlight is cast on the Federal Reserve's use of communication to
connect to and guide public opinion during economic shocks. The Federal Reserve must specify
inflation goals and economic predictions. Communication strategy created a benchmark for
evaluating central bank performance. Therefore, examining the Federal Reserve's methods for
disseminating its monetary policies is necessary. Previous research has demonstrated the
transparency and effectiveness of central bank communication across platforms, including social
media. These studies, however, are primarily compendiums, and some require updating.
Therefore, this article will examine the Federal Reserve's communication channels, goals, and
methods from a particular perspective.
 Table of Contents

1. Introduction

2. Fundamentals and Methods of Communication

2.1 The Fundamentals of Communication

2.2 Methods of Communication for the Central Bank

2.3 Federal Market Open Committee and the Report on Monetary Policy

3. Federal Communication

3.1. Method of Communication

3.2. Notes to consider regarding US Central Bank communication

4. Transparency

4.1. Importance of Transparency

4.2. Measures of transparency

5. Instrument Federal reserve uses

5.1 Inflation targeting

5.2 Forward guidance

6. Recommendations on future communication

6.1 Case study of Chair Powell's conference

6.2 FOMC statements

7. Conclusion
 1. Introduction

“The more fully the public understands what the function of the Federal Reserve system
is and on what grounds and on what indications its policies and actions are based, the simpler
and easier will be the problems of credit administration in the United States.” – Federal Reserve
Board, Annual Report, 1923. (Federal Reserve Communications, 2007) For the public to accept
policies and decisions, there must be open and honest communication, especially from the
Central Bank. As a matter of fact, during times of economic crisis, Central Banks’
communications are of the highest significance since even a seemingly little slip-up may have
far-reaching and adverse impacts on the economy. In light of analyzing the Central Bank’s
actions, people would better understand the importance of Central Bank communications and
related ideas.
The purpose of central bank communications is to let the public know about the central
bank's monetary policy goals and mandates, economic forecasts, and upcoming policy actions.
(Blinder, 2008) Aggregate Demand and Aggregate Supply are crucial to maintaining economic
equilibrium, and both are affected by asset prices, inflation, and interest rates. Therefore, the
central bank must set them to a specific level to achieve its goals and projections. The central
bank would need to alter public expectations if prices and interest rates were to be brought to the
level desired by the institution. It's worth noting that public expectations may influence asset
values and interest rates since they're responsive to previous period prices and inflation, as well
as future projections (Saxton, 1997).
Public expectations are created in response to the information given by the central bank;
therefore, effective communication is crucial. In particular, the ability of the central bank to
influence asset prices and interest rates through changes in public assumptions makes the bank's
communication with the public an important factor in influencing the economy. (Saxton, 1997)
For the central bank to fulfill its mandates and steer the economy in a positive direction, it needs
a mode of communication that is both clear and effective (E.C. Bank, 2008). In addition, the
paper will go into further depth on these strategies and their underlying mechanisms.
2. Fundamentals and Methods of Communication

Central Banks utilize communications and various channels of communication as

instruments in order to conduct monetary policies to lead the economy.

2.1 The Fundamentals of Communication

According to the European Central Bank, communication is defined as “the provision of

information by the central bank to the public regarding … the objectives of monetary policy, the
monetary policy strategy, the economic outlook, and the outlook for future policy decisions”.
(Blinder, 2008) Communication plays an important part in shaping people's beliefs and
expectations in the future. If the public does not know and needs to guess, it is unlikely that the
economy will come to equilibrium, resulting in an unstable outcome. Knowing this, Central
Banks utilize communication to its fullest by being as transparent as possible. This can enhance
the effectiveness of the monetary policy and, in turn, help manage long-term inflation (by
keeping rates on target) and reduce uncertainty. In addition, setting expectations can influence
economic agents and help determine the price and aggregate output. Being transparent also
allows Central Banks to be accountable for their actions. Furthermore, this ensures that CBs are
committed to long-term policy rather than to political considerations.

Overall, Central Banks have become noticeably way more transparent compared to their
counterparts in the last decade, where they are mostly a mystery. In a way, this proves that
communication and transparency in themselves can help improve the monetary policy
effectiveness and the economy in the long run.

2.2 Methods of Communication for Central Banks

2.2.1 Communication by Committee

Communication by committee is when the content, timing, and channel must be chosen
and agreed on by the whole monetary policy committee. (Blinder, 2008) The most common and
effective methods of committee communication are press releases and press conferences. In this
case, they happen on the meeting day when decisions are being announced. Some Central Banks,
like the ECB, also feature a live meeting with a Q&A session afterward. Despite this, it means
that less information is being given out. However, it is compensated by the fact that the Central
Banks also release a quarterly inflation report, as well as monthly and or quarterly bulletins
containing information regarding the assessment of economic developments, analytical
frameworks, commentary on market developments, and monetary policy details. In general,
committees are preferred by most Central Banks and are believed to lead to a superior policy.
(Blinder, 2008)

2.2.2 Communication by Individuals

Some Central Banks, like The Fed and the Bank of England, choose to communicate by
individuals as it offers some distinct advantages that differ from committees. (Blinder, 2008)
One such advantage is that communication by individuals provides greater clarity and common
understanding among the public. This is because the committees should agree on their policies
and views before making a statement as an individual. On the other hand, communication by
committee might present information from too many diverse views, which might be less clear
and, in turn, misunderstood by the public. In addition, it provides greater flexibility since events
aren’t prescheduled. This is important because monetary policy does not always line up with
meetings, and it can cause uncertainty within the economy.

2.2.3 Central Bank Outreach to the Public

Central Banks utilize many means as a way to gain feedback from the public. The most
common methods, as observed in Figure 2.1, are by the internet. In this day and age, it is to
many Central Bank’s advantages to using the internet as a means to communicate as much as
possible. Of 75 sampled Central Banks, it is shown that the bank’s Twitter account is the most
preferred method of gaining public feedback, as users can comment and interact with the bank’s
post.

2.3 Federal Market Open Committee and the Report on Monetary Policy

The Federal Market Open Committee, or the FOMC in short, is the committee under the
FED that manages Open Market Operations and the target federal funds rate. Their goal (of
keeping the economy at maximum employment, making the prices stable, and keeping interest
rates on a moderate level) is done to the full extent by the usage of communication – one of
which is the semiannual report on monetary policy. Incidentally, the aforementioned report states
the Fed’s long-run goals and monetary policy strategy, which is divided into three main parts, as
shown in Figure 2.2. The first part, “Recent Economic and Financial Developments,” as the
name implies, contains information pertaining to matters such as domestic, financial, and
international developments. This topic covers the current situation of various sectors of the
economy, such as the labor market, labor supply, labor demand, employment, wages, inflation,
financial stability, and more. Part two, titled: “Monetary Policy,” covers the target federal funds
rate, the current economic outlook, their assets and liabilities, and the balance sheet. The latter is
important because sometimes, the Fed can choose to reduce its size, which can restrict monetary
policy and increase the federal funds rate. This can help slow down the economy and reduce
inflation. Lastly, the report includes a section, “Summary of Economic Projections,” which
analyzes future projections of the economy in the short and long run. (shown in Figure 2.3)

3. Federal Communication

3.1 Method of communication

The central banking system of the US is called the Federal Reserve, and there are three
main communication methods that are used. This consists of press conferences, social media, and
press releases.

Firstly, a press conference is an interview given to journalists by a prominent person in order to

make an announcement or to answer questions. This method is used in central bank
communication for around 40% of the policy decision announcement. The main advantage of a
press conference is that more information can be given in a press conference than in a press
release. A press release is also more interactive as questions can be asked. But the downside of
press releases is that they might lack interactions.

Secondly, social media. The central bank sees social media as an effective and important means
of communication. Social media are currently heavily used amongst people, so it is a fast and
easy way to reach a large group audience hence they can choose the target audience. On the other
hand, this can also be a drawback to the central bank as it could be hard to reach as social media
is a huge platform that doesn’t only contain several posts. Central banks’ content might be
unseen or flooded by other content, so it is not as reliable to only use social media as a method of
communication.

Lastly, the press release is an official statement issued to newspapers to give information. The
press release is more affordable compared to holding a press conference, and it can still reach a
large group of audience. The downside of the press release is that the central bank does not have
control over what will be written, which could shift the focus of the topic or cause confusion.

3.2 Notes to consider regarding US Central Bank communication

The timeline of central bank communication in the US. The central bank of the US was first
established in the year 1913 to improve the flow of money and credit throughout the United
States in an effort to ensure that banks had the resources to meet the needs of their customers in
all parts of the country. There is no concrete information on when the first press conference was
held or when the first press release was established. Central bank communication started using
the world wide web in the mid-1990s when the Internet had a revolutionary impact on everyday
life, expanding access to information and increasing the speed of communication. They gradually
adopted new technology, and it is still in use currently. After approximately 10 years, social
media was introduced, although social media impact was not as strong as the world wide web.

4. Transparency

Transparency has become increasingly prevalent throughout the decade as an aspect of

monetary policy communication. This is due in part to the success that it has yielded in terms of
economic stability. Transparency refers to the extent through which central banks disclose their
information with regard to the policy-making progress.

4.1. Importance of Transparency

A more transparent central bank would be of benefit in several ways. Firstly, with a more
open central bank, one can expect to see an increase in its credibility. As monetary policy
objectives and operations become more well-known and comprehensible, the public better
understands the changes in policies, and as a result, central banks become more dedicated to their
publicly stated goal. As they continuously achieve their target, their credibility slowly builds up.
With an increase in credibility, expectations formed by the public are able to adjust faster when
met with changing policies, allowing for more flexibility in the labor market and an avoidance of
the wage-price spiral. With increased credibility, goals such as price stability become much more
easily attainable. Secondly, the provision of more complete and well-timed information by the
central bank decreases the volatility in the financial markets. Financial markets perform
significantly better when objectives are clearly clarified, and details regarding the policies are
readily accessible in a timely manner. This is the case because as unnecessary uncertainty and
confusion are diminished, leading to a less volatile market, risk premiums and interest rates will
be lower, leading to a healthier bond and equity market. The resulting effect is that these markets
better convey the prices within them. Moving on, a more transparent policy can welcome a
discussion, debate, and criticism about the policy itself. External analysts to that of the
government can critique the rationale, procedure, and actions of a central bank; The central
banks would then be obliged to confront and reconcile any inconsistencies within its policies.
The outcome of such a spectacle would mean that society as a whole would inevitably welcome
more improved and efficient policymaking.

4.2. Measures of transparency

Transparency is a multifaceted concept that could refer to any aspect of the

policy-making process. Thus, it is not unexpected that a conceptual framework for transparency
that illustrates the different criteria of the decision-making progress to be developed. In the year
2000, Peter Geraats coined 5 key criteria through which transparency can be measured, namely,
political, economic, procedural, policy, and operational transparency.

● Political transparency entails openness regarding policy objectives. This comprises an

explicit prioritization of goals and organizational structure that can shed some light on the
motivations of the policymaker. Good examples of such would be clear inflation targeting
targets, central bank independence, (etc.).
● Economic transparency focuses on the release of economic information that was used in
the process of reaching the final decision for the policy. Such information would be that
of economic data or models that were employed to develop economic forecasts and
evaluate final decisions
 ● Procedural transparency describes the way in which policy decisions are made. The
release of the policy deliberations and how the final decision was reached would be
examples of the case. For instance, the disclosure of voting records and minutes spent.
● Policy transparency refers to the announcement of the policy. Furthermore, it also
explicitly states the reasoning behind such policies and the inclination of the policies to
give some insight into future policy actions.
● Operational transparency relates to the effectiveness of monetary policies through the
method of discussing operational instrument errors and macroeconomic transmission
disruptions.

5. Instruments The Fed uses

5.1.1 Pros

There are numerous advantages to using inflation targeting to communicate with the
mass. The Federal Reserve and many countries, including Thailand, adopted this method. First
and foremost, inflation targeting is ultimately easy to understand. The typical consumer can
easily apply and visualize how the inflation rate will impact their spending behavior. Secondly,
inflation is a benchmark indicator that can be applied to almost anything related to economics
and finance. It also insulates the economy from changes in the velocity of money. It plays an
essential role in determining consumer behavior. The change in expected inflation will change
how a consumer allocates their resource intertemporally. Thus people will choose to consume
more during the present. Inflation also has a relationship with GDP growth. According to Lucas's
critique, reducing inflation comes with a cost. If the federal reserve plans to reduce inflation,
GDP percentages must be sacrificed. The amount of loss depends on the sacrifice ratio.
(Mankiw, page 537). Furthermore, it is very transparent, thus increasing credibility. It forces the
central bank to plan monetary policy that will result in long-term growth instead of using
excessive monetary expansion policy to enhance the economy in the short run. This eliminates
the influence of political parties trying to increase short-run employment so they can benefit
from more votes. The use of inflation targeting to reach the general public has many benefits.
5.1.2 Cons

If the federal reserve misuses any policy or is unable to deliver as promised, it will lose
significant trust making this method less effective in the future. In some cases, the fed has the
incentive to cheat. For example, to encourage more employment, Fed can announce a higher
inflation target. However, when the time comes, the Fed reduces the money supply so the actual
inflation is lower to enhance international competitiveness. Even though inflation targeting is
considered discrete, there is still a constraint. Furthermore, Targeted inflation is not fixed; Fed
can still change its policy. Those are several disadvantages to consider regarding inflation
targeting.

5.1.3 Federal reserve and Inflation targeting

In 2012, the Fed adopted inflation targeting of 2% over the medium term, which seems to
be quite slow considering when other countries adopted this method. As commonly known, there
are several methods that are used for determining inflation, such as the GDP deflator and
consumer price index. The 2% inflation that Fed uses is measured by the annual change in the
price index for personal consumption expenditure or PCE. (Fed, 2012) The Fed claims that this
method is consistent with their double mandate. The Fed has selected target inflation at 2%
because this will prevent deflation from happening, which is related to a poor economic
situation. From a communication perspective, inflation targeting is ultimately easy to understand,
as a short paragraph mentioned earlier is enough for the general public to acknowledge.

5.1.4 Effectiveness of inflation targeting

It can be observed that during the time frame of monetary targeting, the volatility of inflation is
very high, and there are a lot of peaks and dips. After the change, the magnitude of fluctuation
significantly decreased in numerous countries. However, in the USA, the inflation target of 2% is
not quite effective at stabilizing inflation, as seen in other countries. Nonetheless, it is still better
than before inflation targeting was implemented. Inflation targeting is considered to be very
successful at stabilizing inflation during times with no crisis, especially during the pandemic.
5.2 Forward Guidance

5.2.1 Effectiveness of forward guidance

The effectiveness of forward guidance depends heavily on the credibility of the central bank
that issues it. Past action contributes a lot to how confident the firms and individuals are. In
January 2015, the Swiss central bank abolished the exchange rate floor, which was unexpected
by firms and investors. The Swiss franc gained over 14% against the Euro and almost 12%
against the US dollar right away. This was unexpected, given how strongly committed the
previous SNB's communication was to maintaining the exchange rate floor. (Schweinitz, 2021)
After this incident, market participants have lost significant trust, which will dramatically reduce
the effectiveness of SNB’s future-forward guidance. Another factor is that the person who has
authority, such as the president, also has an effect on the integrity of the central bank. For
example, Mario Draghi, former president of the European Central bank, increases a decent
amount of accountability for the whole organization because he is well known for his
transparency as he always reports every action he does.

5.2.2 Benefit of forward guidance

If people believe in forward guidance, then it will make the financial market run
smoothly to avoid shock and panic. By nature, humans dislike uncertainty and want to avoid as
much risk as possible. Minor incidents such as rumors can end up in chaos if people freak out
due to the fact that they are unsure about the future. In some cases, forward guidance can change
economic direction without implementing other policies, such as stating that interest rates will be
low for a certain time, so commercial banks set their lower too.

6. Recommendations on future communication

Strategies for communication that FOMC should do in the future to increase the
effectiveness of monetary policy and credibility.

6.1 Chair Powell’s Press Conference (2022, September): Case Study

According to the transcript, Chair Powell announced that he was strongly committed to
bringing inflation back down to two percent and restoring price stability, which he stated the
main goals clearly. Next, the FOMC should announce their future actions in response to the
crisis, which will make clear understanding so that the public will be able to understand both
their goals and actions. In this case, the FOMC decided to raise the target range for the federal
funds rate by three-quarters of a percentage point and continue to contract its balance sheet.
Thirdly, the FOMC should learn from past errors, for instance, what will be the effects according
to the past when raising the interest rate to reduce inflation. Chair Powell stated that last year The
U.S. economy slowed down from increasing interest rates which led to a decline in the growth of
consumer spending and lower real disposable income. However, the FOMC still decided to raise
interest rates by 3 percentage points this year since the Fed wanted to promote maximum
sustainable output and employment along with the stable price (dual mandate), which higher
inflation has brought massive problems to the purchasing power by increasing the costs of
essentials. Lastly, the FOMC meeting has included the Q&A session in which the chairman will
answer the questions from the members. The chairman should be well prepared for the session so
that it will bring benefits to the members and solve the confusion on any specific topic during the
conference.

6.2 Press Release: FOMC Post-meeting statements

FOMC should simplify the statement that will be posted to the public. Therefore,
statements should be simple and easily readable, which also increases credibility and
accountability. The Flesch-Kincaid measure of readability is a good index to measure the
complexity of the statements; which is higher, the index reflects more complexity. The average
Flesch-Kincaid level for Chair Powell is approximately 16 with a medium amount of words,
while Chair Bernanke in 2014 has the highest complexity level with a Flesch-Kincaid of 21.
(Figure 6.2.) The number of words in the statement should also be rigid as the public would not
want to waste their time reading. Therefore, it is important for the public to have a clear
understanding of the policy so that they can form their expectations. Monetary policy with an
implicit nominal anchor where the central bank is not committed to the behavior rule or
implementing a “Just-do-it” approach is not suggested because this will result in a lack of
transparency and accountability. Moreover, it is inconsistent with democratic principles, although
this was implemented successfully at that time with forward-looking behavior and stress on the
ultimate goal of price stability.
Conclusion

Having open lines of communication may improve the success of monetary policy by
facilitating more informed decision-making on the part of both individuals and businesses. If
policymakers are transparent about their policy aims, the public will have a clearer understanding
of monetary policy. And if they respond to changes in the economy with standardized methods,
the information will enable the general public to make more informed decisions in the future.
They will have a clearer picture of how the policy will respond to both expected and unexpected
shifts in the economy. With this information, households and businesses may make more
informed choices about how much to save, how much to spend, whether or not to hire more
workers, and so on. Furthermore, the general public will have a clearer picture of the strategy
and approach monetary policymakers to use under normal circumstances, which will help them
better comprehend the need for unconventional policy action. A downside is that the public will
have high expectations that the policy will be what the Fed has committed to, limiting the Fed's
ability to respond flexibly to the crisis. When the central bank deviates from its announced or
discretionary policy, it creates what is known as a temporal inconsistency issue.
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Appendices

Figure 2.1. Central Bank outreach to the public vs. % of 75 sampled CBs (Blinder, 2022)

Figure 2.2. FOMC table of contents (“Monetary Policy Report”, 2022)

Figure 2.3. Economic projections (“Monetary Policy Report”, 2022)

Figure 6.2. Complexity of statements

The figure shows the complexity of FOMC statements from 1993-2019, and the number of
words in the statement is reflected in the size of each bubble.
Davis and Wynne (2016) and calculations using the readability calculator:
http://www.readabilityformulas.com/free-readability-formula-tests.php