From Breakingviews - A top tip for central banks: talk less, smile more
Every time a central banker opens their mouth, they take a gamble. If they say the right thing, officials can push people to revive an ailing economy or cool an overheating one. A verbal flub, though, can send shockwaves throughout the financial system.
Perched uneasily on the monetary-policy tightrope, officials can save their breath and focus on the difficult task ahead. His successors, and their peers abroad, have since turned communication into a valuable tool. The Fed adopted so-called forward guidance in 2003, previewing to the public that it would hold interest rates at low levels “for a considerable period.” The simple statement aided their policy of ultra-low borrowing costs and helped revive economic growth. The European Central Bank started using forward guidance in 2013.
, a common measure of market volatility, rose as much as 48% in the weeks after Bernanke’s comments, before easing. The Fed ended up delaying its tapering plans in September 2013 and only started shrinking purchases the following January.Former Bank of England Governor Mark Carney sparked a similar, albeit less troubling, reaction in 2014 when he suggested the body would raise rates sooner than investors expected.
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