The cacophony of Fed’s policy makers

Leaks: a communication arms race

Annette Vissing-Jorgensen studies informal communication by Federal Reserve officials. In particular she looks at the history of leak discussions in FOMC documents for the period 1948-2013. Using a game theoretic framework, she finds that leaks are often motivated by disagreement between policy makers and are used for tactical advantage in the policy making process.

If communication reduces flexibility and spin is possible, a given policy maker has an incentive to distort market perceptions about the average policy preference in his preferred direction because this will tend to move the actual policy rate chosen in his preferred direction.

There are three costs from leaks:

• Lost policy flexibility;
• Damage to the Fed’s reputation and;
• Damage to the Fed’s decision making process.

Central Banking with Many Voices: The Communications Arms Race
Author: Annette Vissing-Jorgensen
From: University of California Berkeley

Would knowing who is consistently a hawk or dove in real time mitigate the problem?

Istrefi Klodiana in this paper constructs a measure of policy preferences of the Federal Reserve officials as perceived in public. She looks at the media perceives the policy preferences of 130 FOMC members during 1960-2015. She finds that 70 percent of these FOMC members are perceived to have had persistent policy preferences over time, i.e they are either hawks or doves. The remaining 30 percent are perceived as switching between types, whose preferences are unknown to the markets. This hawk/dove measure can be used to investigate questions that relate to market perceptions on who is in majority, the hawks, the doves or a balance.
In Fed Watchers’ Eyes: Hawks, Doves and Monetary Policy
Author: Istrefi Klodiana
From: Banque de France