Over the past half-century, the Fed has moved from the calculated silence of Paul Volcker to using communication as a monetary tool just as decisive as interest rates. However, Kevin Warsh, its current chairman, wishes to reverse this trend and establish a narrative that is less forward-looking, more discretionary and one that restores strategic uncertainty. This dialectical shift coincides with unprecedented pressure from the White House regarding the Fed’s sovereignty and independence, and raises a perilous conundrum: to what extent can an institution remain silent when its credibility depends precisely on the markets and society understanding why it acts as it does?
“If I seem unduly clear to you, you must have misunderstood what I said”. Few phrases have better defined an era of monetary policy than that boutade – an extravagant and witty remark – by the recently deceased Alan Greenspan: “If I have seemed too clear to you, you have probably misunderstood me”. But the phrase was no mere quip. It was the philosopher’s stone upon which the Fed has built its communication strategy. This is no trivial matter, given that its explanations have ended up being far more significant than market participants could ever have imagined.
The remark was made in September 1987, just five weeks after he took the helm of the Fed, during a hearing before the US Senate Banking Committee. It was offered, with an undeniably ironic tone, in response to the senators’ questioning regarding the traditional reticence of central bankers to explain the monetary policy decisions being debated by the Federal Open Market Committee (FOMC) – the ‘engine room’ where the price of US money is determined. But also, and paradoxically, Greenspan used it in the run-up – specifically, four weeks earlier – to Black Monday on 19 October of that same year, when there were already signs on Wall Street of a stock market crash. All of this earned him a reputation from which he never strayed.
For much of the 20th century, the Federal Reserve regarded ambiguity as an integral part of its authority. A central bank should not anticipate every move, because uncertainty was also a tool of monetary policy. In a way, a sort of dogma took hold, asserting that its credibility rested on its decisions, not on its explanations.
Nowadays, it might seem as though that way of exercising control over interest rates belongs to another world. After all, over the last two decades, the Fed has set out the positions and approaches of its executive board in its minutes. In doing so, it has explained, anticipated, guided and, at times, almost dictated market expectations.
Less transparent, and less sovereign?
But the world – and the Fed is no exception – is always full of surprises. Kevin Warsh, its newly appointed chairman, wants to change that paradigm. Since joining the central bank par excellence – the guardian of the gold standard – he has advocated simplifying official language, reducing the emphasis on forward guidance – guidance on the future direction of monetary policy – and has comprehensively overhauled its entire communication strategy. Warsh’s assessment makes it abundantly clear that the Fed talks too much and makes excessive commitments to a future that the economy frequently contradicts.
It is not a question of style. It is a debate about how monetary power should be exercised. And it comes at a delicate moment, when the nightmare of a White House seeking to control the Fed’s every move has resurfaced with a vengeance. The parting words of Jerome Powell, spoken as he handed the reins of this sovereign institution over to Warsh, hint at the gravity of this change of course: “From now on, the Fed will be subject to a constant stress test regarding its degree of independence.”
From Volcker’s silence to the narrative of expectations
The Fed’s contemporary history is defined by its last six chairmen. All of them played a part in transforming the US central bank into the institution we know today.
Paul Volcker, appointed in 1979, never believed that credibility could be shaped by speeches. He took office with inflation running at over 13 per cent, raised interest rates to unprecedented levels, tackled two consecutive recessions and ultimately brought the surge in prices caused by the oil crisis – triggered by the then newly formed OPEC – under control.
The way he expressed himself was consistent with that view. He spoke little because he believed that a central bank derived its legitimacy from its actions. In those days, the Fed did not even officially announce its interest rate decisions. It was up to market participants to deduce them by observing the central bank’s manoeuvres. Volcker was the embodiment of an era in which authority stemmed from silence.
Alan Greenspan inherited that culture, although he refined it with a jargon of his own. The famous Fed Speak was not a gamble for its own sake on intellectual opacity. It was a way of preserving flexibility. The less explicit he was about his future intentions, the greater capacity he would have to react to events that were unforeseen. Paradoxically it was also Greenspan —nicknamed ‘the Maestro’— who began to dismantle that model. In 1994, still in the first phase of his long tenure (which lasted until 2026), it was announced officially, for the first time, that a decision on interest rates had been made. That move marked the beginning of a revolution that went unnoticed. The Fed acknowledged that transparency strengthened its legitimacy.
But the chief architect of this new paradigm was Ben Bernanke. An academic before becoming governor and a Nobel laureate, he realised during the 2008 credit crunch that conventional monetary policy had reached its zenith. With interest rates close to zero, words took on enormous economic significance. If households, businesses and investors were confident that interest rates would remain low for a long time, they would immediately adjust their spending and investment decisions.
Communication ceased to merely explain monetary policy and instead became an integral part of it. Alan Blinder, Professor of Economics at Princeton, former Vice-Chair of the Fed and author of The Quiet Revolution: Central Banking Goes Modern – an essay regarded as the bible of US monetary strategy – shares this view. He argues that the crucial shift in central banks over recent decades has not merely been about gaining greater independence, but about realising that communication had ceased to be a public relations exercise and had instead become a “strategic and sovereign instrument”.
Janet Yellen, who pushed for the regulatory clock to be reset to zero in 2009 and for rules to be imposed on the banking sector to prevent another credit crunch caused by the accumulation of toxic assets on their balance sheets, and who later served as Treasury Secretary in the Biden administration, consolidated her predecessor’s approach. Her contribution was less spectacular, but perhaps more profound. She made transparency a daily exercise in economic education. Explaining decisions was no longer a concession to the markets; it was a democratic obligation of an independent body.
Jerome Powell took this model to its logical conclusion. Press conferences began to be held after every FOMC meeting. Economic projections and the famous dot plot – an infographic showing the interest rate levels envisaged by each of the 19 members of its governing board – lent rigour to the direction of its monetary policy. During the pandemic and the subsequent bout of inflation, managing expectations was just as vital as the interest rate decisions themselves.
Has the Federal Reserve spoken too much?
That is precisely the question Warsh raises. For years, Trump’s current representative at the Fed has argued that the institution is held hostage by its own words. By offering too many clues, it has narrowed its room for manoeuvre and accustomed the markets to interpreting any nuance as a commitment. He says he does not wish to return to Volcker’s secrecy. But he remains determined to move away from the idea that he must continually anticipate the path his monetary policy will take. The economy changes too quickly to promise on any given day what will happen in six months’ time, he explains.
This view is echoed by leading economists. Some, such as Mohamed El-Erian, President of Queens’ College, Cambridge, warn that forward guidance can become an obstacle when the economic environment becomes uncertain again, as each statement can be interpreted as an irrevocable promise. Others, such as Otmar Issing, chief economist at the ECB, emphasise that excessive explanation can convey a false sense of precision in a world – the investment world – where uncertainty never disappears. And Mervyn King, former Governor of the Bank of England (BoE), warns that monetary authorities may end up promising a degree of foresight that no think tank can honestly offer.
However, the debate ceases to be purely technical when one considers the political context. Over the last decades, the Fed’s communication has served, above all else, to safeguard its independence. The more transparent its decisions were, the more difficult it was to question that they were based on economic criteria rather than on partisan pressures.
That is why the coincidence between Warsh’s media silence and Donald Trump’s attack on the Fed’s independence is causing concern. In such cases, perception matters. This is the view expressed by Raghuram Rajan, former chief economist of the IMF and adviser to the Indian Prime Minister. In his view, monetary sovereignty is not a permanent privilege, but a legitimacy that must be constantly renewed in the eyes of society and which demands explanation.
History will tell whether this shift strengthens the Fed’s capacity or undermines one of its key assets – its official discourse – which it had built up over forty years and which was designed to explain clearly how and why its decision-making would affect savings, employment, investment and, ultimately, the daily lives of millions of people.
But, meanwhile, it is worth not forgetting that communication has never been a mere exercise in public relations. Rather, it forms part of the exercise of power. So that the real risk may well not be so much that the Fed stops whispering to the markets, as that, when lowering its voice, other market participants end up speaking on its behalf.
