Central Banking with Many Voices: The Communications Arms Race

Annette Vissing-Jorgensen

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    Federal Reserve policy is set by group decision making. If policy makers care about being predictable (i.e., not choosing a policy that differs from prior policy maker guidance), they compete for the attention of financial markets because those who succeed in moving the markets’ policy expectations gain the upper hand in policy making. This leads to a cacophony of public appearances but also to a “quiet cacophony” of informal communication between policy makers and market newsletters or the news media. Informal communication gets around the FOMC’s internal norm to not comment on the views of colleagues and rules against disclosing classified information. I provide: (1) a brief review of recent evidence suggesting that informal communication from the Fed has had a large stock market impact, (2) an account of discussions of leaks in FOMC documents, and (3) a model of the game theory of the quiet cacophony. Policy makers care about market expectations and are able to distort these by selectively revealing
    information. With sufficient disagreement, the game resembles a prisoners’ dilemma. All policy makers use informal communication even though it reduces welfare via reduced policy flexibility and harms the Fed’s reputation and the quality of its deliberations. I discuss approaches to improve the current undesirable state of affairs.