Lessons in communication for Kevin Warsh. With Chris Giles

Soumaya Keynes (0:00)

It is not a calm time in markets right now. Amid the war in Iran, an extraordinary AI buildout and fears about unsustainable public finances, bond yields have been climbing. As investors lose their cool, where are central bankers? Offering words of calm or adding to the anxiety?

Or perhaps they're taking this moment, this tense moment, to re-evaluate the way that they communicate?

SPEAKER_2 (0:28)

Transparency in communications about future policy decisions is not an end unto itself.

Communications must be in service to the Fed's paramount responsibility. What is that that's getting policy right?

Soumaya Keynes (0:44)

I am of course referring to one central banker in particular, Kevin Warsh, the new Chair of the Federal Reserve Interest Rate Setter in Chief. He has been trying to give investors some tough love this year, saying that if they are feeling stressed, sorry, they should not look to him for guidance. If they want to know what's going on in the economy, they need to look at the data, not rely on Uncle Kevin to hold their hand and tell them what is coming.

To get a sense of how the communications revolution is going, I thought it would be good to speak to the person who consumes more central bank communications than anyone else at the FT. I'll ask, is there such a thing as too much talking from a central bank?

This is The Economics Show with Soumaya Keynes. I'm joined today by my brilliant colleague, Chris Giles, fellow economics columnist and author of the newsletter, Chris Giles on Central Banks. Chris, hello.

Chris Giles (1:44)

Hi Soumaya.

Soumaya Keynes (1:45)

Okay. I am going to break with precedent here and ask you a question before the one where the answer has to be on a scale of 1 to 10

That question is, why should we care about this? When central bankers are speaking to the public and also investors, why does the way that they communicate matter so much?

Chris Giles (2:07)

Well, first of all, I'm honored that you're breaking convention just for central bank communications. So it must matter. But the question is, why? Well, at the root of all this, central bankers are trying to control inflation. And to do that, they have to go through both financial markets and the decisions and the spending decisions and saving decisions of households and companies. So they need to get their message across to have the effect that they want to have on those decisions, both in financial markets and wider in the economy.

I mean, in the end, a lot of inflation control is a confidence trick, isn't it? So what you need to persuade the public is not just that your interest rates are the right level of interest rates to control inflation, but they have to think that because the more they think that both markets and the general public, the more they'll behave in ways that inflation will be under control.

Soumaya Keynes (3:01)

And what happens if they get it wrong?

Chris Giles (3:04)

Well, if they get it wrong in financial markets, you can see things are priced incorrectly.

So, that means you can get a hell of a lot of volatility and you see a lot of backwards and forwards as central bankers then have to go and try and repair the damage they've made. And potentially, it can be really quite serious and quite important things like government bond markets, the cost of debt, all of these sorts of things.

And if households and companies get the wrong message, then they just won't behave as the central bankers are expecting. And so, the control of inflation won't be nearly as rigorous as they hope.

Soumaya Keynes (3:42)

Okay, so now we all care deeply about this. Let us give out some scores. So on a scale of 1 to 10, your favorite scale, how well do central bankers communicate?

Chris Giles (3:55)

Well, I love the scale. And I'm going to be a little bit weaselly here and go for a middle sort of number, about 6, I'd say. They think about communication a lot. And the model, independent central bank setting monetary policy and looking after financial stability is not under any threat. So you can't give them a very low score. So you can't say they're rubbish at it. But they often get misunderstood.

They sometimes screw up.

Soumaya Keynes (4:20)

That is disappointingly weaselly. Could you at least tell me who is top and bottom of the class?

Chris Giles (4:27)

Yeah. And I think I can give you a relatively objective score here because nearly all the big central banks have objective measures of how much the public trust them. And so top of the class at the moment is Christine Lagarde at the European Central Bank. Not always been the case and the European Central Bank was not trusted by European public in the euro crisis years, but the trust levels are in positive territory and getting better and better as we speak in recent years. Bottom of the class, I'd say equal bottom is the Bank of England and the Federal Reserve, so the UK and US Central Banks. In the Bank of England, the objective trust scores are pretty zero at the moment and have been for quite a while.