Lessons in communication for Kevin Warsh. With Chris Giles

0:00It is not a calm time in markets right now. Amid the war in Iran, an extraordinary AI build-out, and fears about unsustainable public finances, bond yields have been climbing. As investors lose their cool, where are central bankers? Offering words of calm or adding to the anxiety? Or perhaps they're taking this moment, this tense moment, to re-evaluate the way that they communicate. Transparency in communications about future policy decisions is not an end unto itself. Communications must be in service to the Fed's paramount responsibility. And what is that? That's getting policy right. I am, of course, referring to one central banker in particular, Kevin Walsh, the new chair of the Federal Reserve Interest Rate Setter-in-Chief.

0:53He has been trying to give investors some tough love this year, saying that if they're feeling stressed, sorry, they should not look to him for guidance. If they want to know what's going on in the economy, they need to look at the data, not rely on Uncle Kevin to hold their hand and tell them what is coming. To get a sense of how the communications revolution is going, I thought it would be good to speak to the person who consumes more central bank communications than anyone else at the FT. And I'll ask, is there such a thing as too much talking from a central bank?

1:31This is The Economics Show with Samaya Keynes. I'm joined today by my brilliant colleague, Chris Giles, fellow economics columnist and author of the newsletter, Chris Giles on Central Banks. Chris, hello. Hi, Samaya. Okay. I am going to break with precedent here and ask you a question before the one where the answer has to be on a scale of one to 10. And that question is, why should we care about this? So, you know, when central bankers are speaking to the public and also investors, why does the way that they communicate matter so much? Well, first of all, I'm honoured that you're breaking convention just for central bank communications.

2:12So it must matter. But the question is why? Well, at the root of all this, central bankers are trying to control inflation. And to do that, they have to go through both financial markets and the decisions and the spending decisions and saving decisions of households and companies. So they need to get their message across to have the effect that they want to have on those decisions, both in financial markets and wider in the economy. I mean, in the end, a lot of inflation control is a confidence trick, isn't it? So what you need to persuade the public is not just that your interest rates are the right level of interest rates to control inflation, but they have to think that.

2:54Because the more they think that, both markets and the general public, the more they'll behave in ways that inflation will be under control. And what happens if they get it wrong? Well, if they get it wrong in financial markets, you can see things are priced incorrectly. correctly. So that means you can get a hell of a lot of volatility and you see a lot of backwards and forwards as central bankers then have to go and try and repair the damage they've made. And potentially it can be really quite serious and quite important things like government bond markets, the cost of debt, all of these sorts of things.

3:27And if households and companies get the wrong message, then they just won't behave as the central bankers are expecting. And so the control of inflation won't be nearly as rigorous as they hope. Okay, so now we all care deeply about this, let us give out some scores. So on a scale of one to 10, your favourite scale, how well do central bankers communicate? Well, I love the scale. And I'm going to be a little bit weaselly here and go for a middle sort of number, about six, I'd say. They think about communication a lot. And the model, independent central banks setting monetary policy and looking after financial stability, is not under any threat.

4:11So you can't give them a very low score. So you can't say they're rubbish at it. But they often get misunderstood. They sometimes screw up. That is disappointingly weaselly. Could you at least tell me who is top and bottom of the class? Yeah, and I think I can give you a relatively objective score here, because nearly all the big central banks have objective measures of how much the public trust them. And so top of the class at the moment is Christine Lagarde at the European Central Bank. Not always been the case, and the European Central Bank was not trusted by European public in the euro crisis years, but the trust levels are in positive territory and getting better and better as we speak in recent years.

4:56Bottom of the class, I'd say equal bottom, is the Bank of England and the Federal Reserve, so the UK and US central banks. In the Bank of England, the objective trust scores are pretty zero at the moment and have been for quite a while. And at the Fed, there's a real problem of partisanship, which is a problem in the US generally, but their trust in the chair of the Fed is pretty much zero as well. Is it possible, though, that people are just giving responses based on how much they hate inflation, not really how well the central bank has been communicating. Is it really fair to take these public trust measures as assessments of how well central bankers are doing in that space?

5:41Well, first things first, life isn't fair. And this is the best measure we've got. Inflation was high in all of these central banks. And it's clear that certainly as far as the public concerned, they're happier with the ECB than they are with the Bank of England or the Fed at the moment? I think in recent years, the ECB has actually had a really effective communications strategy. It's very boring. It's really, really dull. Never listen to a press conference. But it's very clear what the message is. And it's been less clear. And there'll be more political arguments about what the central bank is going to do, particularly in the US.

6:20And in the UK, there've been quite a few communications mess-ups in the past few years. Well, look, that's the public. But how should we assess how well central bankers are doing when communicating with investors, with the people managing markets? Perhaps the best way of measuring this is through two measures. One is inflation expectations in financial markets. That is, what do financial markets think inflation is going to be at some point in the future? And another is how volatile are the financial markets that depend or are very closely linked to what central banks do, both in the interest rate markets and in inflation expectations markets.

7:03I think the big picture is it's been pretty good. So long-term inflation expectations, so five years ahead and then the following five years. So the first five years of the 2030s, everything looks okay. So it looks as if people think central banks will get their act together. In the 2030s, inflation will be close to target. But in the near term, you do see quite a bit of deviation from the targets. So in the UK in particular, you see inflation expectations in the near term really quite high. That's over the next three or four years, not just over the next year. And in the US, you've seen a lot of volatility, both in short-term inflation expectations and in short-term interest rate expectations.

7:45So in some sense, The whole move from Jay Powell to Kevin Walsh is not quite properly understood yet in financial markets. Right now, we're having a pretty spicy time in government bond markets. Is there any possibility that some of that volatility is actually the consequence of miscommunication by central banks? There is a bit of a possibility because, you know, one of the things that we saw over the summer period, particularly in July, we saw Kevin Walsh at the Federal Reserve give a press conference at the end of July in which he basically said nothing. He said he wouldn't even effectively talk about what was happening in the US economy.

8:31And it was at that moment that US government bond yields, or the cost of borrowing for the US government, started to rise pretty fast. And it's been rising fast since. So if you, in that sense, lose some sort of control, now it's very hard to pin down whether it was that press conference that did it or other things that are going on, the Iran war, etc. There's a lot going on in the world at the moment. But we know that that press conference was a bit of a catalyst, and I wouldn't want to pin down the whole 30-year high in government bond yields in the US on Kevin Walsh's rather poor press conference in July, but it certainly doesn't help.

9:09Okay, well, that's one example of a miscommunication. Do you have any other favourites? You've been covering monetary policy for a while. I'll give you another Kevin Walsh one first. That is that he said quite a lot recently that inflation is a choice. And what he means by that is in the long term, it's up to central banks to get inflation under control. But his particular use of the phrase suggests that any sort of inflation, even if it comes from abroad, petrol prices, oil prices going up, is the fault of the central bank. And he might come to regret that phrase at some point because inflation isn't always a choice, at least in the short term.

9:46Right. When Trump is bombing Iran and sending gas prices soaring in a way that the Fed might not want to offset immediately or be able to, you might not want to take responsibility for that. What else? What are your other favourite miscommunications? Well, I think another very good example of a miscommunication comes from the last big inflation peak in 2022. Let's go across the Atlantic, come back to the UK here. Andrew Bailey, Bank of England governor, was asked, you know, should people ask for a pay rise? And he basically said, no, people shouldn't ask for a pay rise. And it caused all sorts of bother for the bank and, you know, a huge outcry in the country with the Daily Star putting on its front page, the plank of England was its headline with a figurehead of Andrew Bailey, because it's not his position to tell people what to do.

10:41It's his position to look at what people do and then respond with interest rates with monetary policy. And so what he should have said was, well, people should do what they like. If they ask for a pay rise, that might mean we have to take more action to ensure that that pay rise doesn't become a persistent inflationary threat to the UK economy. And that's a very different answer to telling people what to do. And that really sounded like, he was on£500 ,000 a year and it sounded like a rich person telling poor people that they shouldn't ask for a raise. I wonder in that episode, could he have won?

11:18I mean, if he had said, if you ask for a pay rise, I'm going to raise rates, that sounds a bit threatening, potentially. I don't think you have to put it in exactly that language. You just say that you will do whatever it takes to meet the inflation target. And you certainly don't threaten people like that. Okay, well, there has been a lot of grumbling about Kevin Walsh over the past few months. What's your explanation of what he was trying to do in his kind of reform to Fed communication? Well, he really hated the idea of a thing called forward guidance, which everyone has a different definition of this.

11:55But his particular definition really means telling markets where interest rates are going to go next. So along the lines of saying, we at the Fed have set interest rates at between four and four and a quarter percent, and we expect them to rise maybe two more times before the end of the year. That sort of communication, he absolutely hates that. He thinks that is holding markets' hands, and he wants to get information from markets and not just have his view parroted back to him by financial markets, sort of listening to him and then saying the Fed is going to do exactly what he's just said they're going to do.

12:33So you get this sort of hall of mirrors problem where everyone's looking at everyone else, and you don't really know what's going on, and you can't get proper information from financial markets. And as part of the whole process of not wanting to hold markets' hands, one thing that Kevin Walsh did right from the start of when he became Fed chair was not to participate in the quarterly summary of economic projections that all of the other members of the Fed's decision-making body use. So one of the things they do is every quarter, they say, what do they think interest rates will be? What's the appropriate level of interest rates at the end of this year, at the end of next year, at the end of the year after?

13:17And these are all then charted as dots, not with anyone's name by them. And it's called the dot plot. And markets definitively overanalyse this and think of this as what exactly the Fed is going to do, even though the Federal Open Market Committee members often change their minds and the dot plot changes, it gets way too analysed. And it's also a problem in that you see all these dots and you think, well, this is what the Fed thinks it's got to do, but you don't know why they think this is what the Fed has got to do. The narrative matters as much as the level of interest rates in many ways. And that's The other reason that Kevin Walsh really hates the way that the Fed currently communicates.

13:59It sounds like you think that he has a point. I do think he has a point. I certainly won't mourn the dot plot's death. I think he could overstate his point. So I don't think it locks the members of the FOMC into their dot and then they're unwilling to change it as the facts change. And we can see this this year that the dots have changed a huge amount. but I don't think it tells us what we really want to know from a central bank is why have they taken the decision they've taken? What do they think about the future? What might change their minds about the future when things happen? Those are the sorts of things we need to know, not what are you going to do?

14:37So I think Walsh's intention was pretty clear when he came into office, right? But could you talk a bit about what has happened since that July press conference. It seems like he's perhaps had to change course a little bit. Do you think he's learned any tough lessons about communication since then? Yes, he's had to backtrack. He's had to U-turn effectively. Not all the way. He still clearly believes he doesn't want to hold hands nearly as much as he thinks the Fed did in the past. But because he said so little, he almost didn't even explain what he thought was happening in the US economy in the July press conference.

15:14And so what's happened since? Well, at first, very little happened. And then at the end of August, there was a big speech, the Jackson Hole speech every year. And there, effectively, Kevin Walsh pretty much backtracked and said, actually, this is what I think about the economy. I think inflation has been too high for much too long. And unless I see something very drastically improving in that, we will have to raise rates. I mean, that was the subtext. That's what everyone took from that speech. Then we had one inflation figure, which we never want to set everything onto one inflation number. It wasn't great.

15:49And then the Fed raised rates. And then in the press conference after the September meeting, Kevin Walsh was much more willing to talk about what he thought about the economy, not willing to say where rates would go next. But in that sense, you don't need that. It was much more of a, this is the sort of thing that prompted the decision we took. and it might not be the end of it. You need to decide, but this is how we are seeing the economy. And that was a massive change from July. Okay, now thinking more broadly than just the Fed, are there any other ways of communicating like the dot plot that you would bin maybe from other places around the world?

16:31Yeah, I think there's lots of things don't work brilliantly in lots of forms of communications. the Bank of England for a long time used fan charts to try and communicate uncertainty and also what they think was likely to happen to inflation and growth and therefore what interest rates might be needed. It was entirely impossible to take from those fan charts essentially what actually the message was. It was very difficult so we always had to simplify them in a way the Bank of themselves hated, but actually to extract a message. But also they would just make the fans as wide as they like, essentially on a whim, or they'd put a skew in it.

17:12So they say risks on the upside or the downside, essentially on a whim. And it didn't really tell us very much again about what decisions has the central bank taken? What's its assessment of the economy? Why has it taken a decision? What might change that in future? And what is it looking at to judge why it might change those decisions in future? And it's that sort of, you've got to talk about the future, because we think monetary policy only has an effect in the future. So you can't take a decision today without talking about your view of the future. But you don't want to tie yourself down. And you also want to explain what your thinking is and what might change your mind.

17:54So just thinking about the bigger picture here, I mean, you know, the trend over the past few decades has been towards much, much more communication from central bankers. I mean, you know, the Fed didn't even used to tell investors what the base rate was going to be, right? They just used to, you know, get investors to infer it. Do you think that in some sense that they've gone too far in the other direction, that there's too much communication? No, I don't think there is. I think in a modern democracy where these people are taking really important decisions that affect us all about something that's really important, inflation, we do need to know why they take the decisions they do.

18:30But we want to make it easy for them to change their minds, because we want them to be flexible when the world changes. There are different ways of doing it. There's a big fashion at the moment for showing scenarios, which could say, well, if this happens, then we are more likely to do that. And that's worked quite well, particularly for the Bank of England and European Central Bank this year, because there's been one thing that's mattered more than anything else, which is what happens to oil prices and energy prices and the war in Iran. But interestingly, the ECB's chief economist has recently said that actually that has made people over-focus on energy prices to the exclusion of everything else.

19:13And that is clearly a risk with scenarios. There are some examples around the world of central banks that do it completely differently. And they're not necessarily ones that you might have heard of. So if you look at what the Armenian central bank does, is they've basically ditched forecasting at all. And they just take a market view of what their rate is likely to be. And then they just talk about why it might be higher than that view, or why it might be lower than that view, what would happen. And they put out a big list every quarter and say, we will have rates higher than this path if these things happen.

19:50And if these other things happen, they'll be lower than this path. It's quite an interesting and quite subversive way of doing it in a completely different way. Could the global financial system cope if the US or the ECB, the European Central Bank, opted for that method? I don't think they could quite cope with that method, but I think they could borrow some aspects of that method and have much more of a, what is it that we're really looking at? And what is it that might make us take a different view of the economy and inflation? I think they probably need still some sort of baseline forecast.

20:27They can't just ditch it entirely and say, as the Armenians have, that forecast are useless. We're talking narratives instead. But it's interesting that there are people doing things quite differently around the world. And it's not always the big central banks that are making waves. Another really interesting central bank, I think, is the Swedish central bank, the Riksbank, because there they have a very explicit forecast of their own interest rates and are very explicit in showing how that's changed. So that demonstrates that they say it's not a promise, it's just a forecast. And so as the world changes, our expectations of where interest rates are going to go change.

21:07And if you go back, you can see that often they've been wrong. That might, you think, undermine their credibility in some ways. But I think it's more appropriate that it shows how uncertain the world is and that sensible people taking these decisions have to have flexibility to change their minds. Okay. Well, look, Chris, we should go to a break now. And when we get back, I'm going to ask you how you would redesign the way that central bankers speak.

21:48We'll see you next time.

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22:19We are back from the break. So one thing that Kevin Walsh has done in the US is form a task force on how the Fed should change its communication style. And that task force is meant to come up with recommendations in the new year Chris, if you were in charge of making those recommendations, what would you say? Well, let's look at really practical terms. Let's assume the dots are dead. And what would you replace that with? The Fed is unusual in not producing a forecast, and it would be better if the Fed had a forecast, maybe because there's 19 members of the committee, and they're never going to agree a collective forecast.

22:59You have to then have a staff forecast, which is rather like what the ECB puts out. And people can then disagree with that. So you could have a staff forecast and maybe some staff scenarios. How would this forecast change? And what are the interest rates that are consistent with each different scenario? And you have that. And then the Fed committee then can vote on whether they agree with that forecast or not. And importantly, for those who don't agree with it, you need to have a bit of an economic narrative again. Why not? OK, I mean, that sounds quite reasonable. But channel your inner Fed old timer.

23:39Why are they panicking? Why don't they want that to happen? Well, I think there's always a reluctance to be more transparent. Now, transparency can go too far. But I think in the Fed's case, it doesn't go far enough. Nearly always when central banks become a little bit more transparent, there's fears that the sky will fall in and people will use the forecast in a terrible way. And they just don't happen. Or people will take the forecast as a promise and you can't then change interest rates. And that doesn't happen either. So I'm not at all worried about those sorts of problems, which central bankers often are.

24:17And so that's why I think this is what they should do. Do I think it will happen? No. I don't have any inside information on that, but I fear that we might be going down a less transparent rather than a more transparent route. Do you have a prediction for where we're going to be in, say, 10 years? Do you think there'll be much more kind of clear, sensible transparency of the flavour that you've recommended? Or do you think that central bankers are kind of going to cling on to the way that they've done things, you know, teach the markets that you can't over-interpret every sneeze that we make during a press conference, that sort of thing?

24:55I think the tide of history is pretty clear on this, that we are going towards more transparency, whatever Kevin Walsh or other central bankers might think, just because I think people just find it unacceptable if central bankers aren't saying why they've taken the decisions they have. And that creates a clamor of noise for them to explain themselves if they don't. So I think that's where it's moving in that direction. It's going to be a wiggly path, though. And there's going to be a lot of experimentation and a bit of blowback. And you can go too far with transparency. Not all transparency is good transparency.

25:34If it means you don't have a proper discussion in a meeting because everything is going to be broadcast, it's live on TV, that would be very, very transparent indeed. That would be a worse outcome. So, you know, there are trade-offs here, but we are moving towards more transparency, I'm sure of it. hmm um and then final question you know in this moment right where you've got all this uncertainty in bond markets uh what would be your advice to central bankers sort of navigating this terrain in terms of communications well i think obviously when things are a little bit tense out there then do no harm is the first piece of advice i mean it's a bit obvious isn't there.

26:18But clarity, I think, is like, why have you taken the decision you have? What are you looking at? Let's be super clear about this. That is, I think, the key piece of advice so that at least if things are difficult out there, you're not going to be misunderstood. I mean, good communications isn't great for economics journalists, though, is it, right? If they were super clear about everything, then maybe we wouldn't have as much work to do. I know it's you know I'm putting myself out of a job that an AI and I've got no no future at all great well happy don't turn things on uh Chris thank you so much for joining me it's a pleasure Smeya

27:05that is all for this week you have been listening to the economics show with Simea Cainz If you enjoyed the show, then I would be so grateful if you could rate and review us wherever you listen. This episode was produced by Katya Kumkova, with original music from Breen Turner and sound design from Sam Jovinko. Our executive producer is Manuela Saragossa. I'm Samir Cainz. Thanks for listening.

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