Can central bankers talk too much?

IMAGINE YOU are a journalist trying to reassure your bosses that you will hit a tight deadline. What would be more effective: a forceful but brief commitment that you will do whatever is needed to get the job done, which leaves them in the dark on all the things that might go wrong along the way? Or a plan detailing every step you will take—but in which they can spot unnerving risks?

That resembles the choice central banks face as they try to convince financial markets and the public that they will meet their goals. Over the past decade their preference has been clear: the more transparency and detail, the better. In 2011 America’s Federal Reserve began holding press conferences after its monetary-policy meetings. It started publishing the range of rate-setters’ economic forecasts the following year. Across the rich world, forward guidance on the path of interest rates has become part of the toolkit. Central bankers make ever more speeches, bringing once-hidden debates out into the open. Some tweet their views.

The theoretical justification for all the talk is strong. The more markets understand how the central bank will react to events, the better they anticipate future policy. Conditions in financial markets should immediately tighten or loosen in response to economic news, making central bankers’ jobs easier. It is...



via The Economist: Finance and economics Business Feeds

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