Deciphering the Fed Is a Test Even High School Kids Can Pass Now

Major central banks may be struggling to contain inflation, but they are at least making progress toward another goal: plain speaking.

(Bloomberg) — Major central banks may be struggling to contain inflation, but they are at least making progress toward another goal: plain speaking.

According to research by economists at the Bank of France, people need five fewer years of education to understand a Federal Reserve monetary-policy statement since a review by officials in August 2020. Such remarks can now be processed by readers with the attainment level of a 15 or 16-year-old high school student.

Equivalent statements from European Central Bank and the Bank of England remain harder to grasp, though their recently introduced summaries of decisions have managed to bring monetary policy-speak within the reach of 13 or 14 year-olds.

The era of central-bank lucidity is still young. It follows decades of jargon-clouded communication once epitomized by former Fed chief Alan Greenspan’s quip that “if I seem unduly clear to you, you must have misunderstood what I said.” 

Making the case for clarity in 2017, former Bank of England Chief Economist Andy Haldane remarked that 95% of the public were likely to find central-bank publications inaccessible. 

An ECB paper last year warned that jargon can make it harder to achieve inflation goals, while effective communication to a broader audience can better influence inflation expectations and economic behavior, and bolster legitimacy and accountability.

“The idea is to explain monetary policy in simpler terms, so that people can understand why decisions are taken and what this means for their lives,” Bank of France economists Sylverie Herbert, Klodiana Istrefi and Giulia Sestieri wrote in their recently published study.

In 2017, the BOE introduced three layers of communication to outline its interest-rate decisions, including an abbreviated format with icons and another longer version it has described as “in-a-nutshell.”

Since a 2021 strategy review, ECB monetary policy statements have been accompanied by “at-a-glance” cartoons. Recent examples show somebody carrying percentage signs up stairs, and a person with an umbrella sheltering from the rain of a poor economic outlook.

The Bank of France researchers used the Flesch-Kincaid readability test to approximate the number of years of education needed to understand statements. More accessible policy remarks tend to feature everyday language, using “economy” instead of “gross domestic product,” and substituting “employment” with “jobs.”

The ECB and BOE’s boiled-down versions scored below 8 years of educational attainment, compared to around 15 years for the main statements. 

The Fed’s monetary policy statements were least comprehensible in 2014, when they required more than 18 years of education to understand, the study showed. 

Clearer communication might conceivably be helping non-humans too. Separate research published this month suggested the artificial intelligence tool ChatGPT can decipher whether Fed statements are hawkish or dovish.

The Bank of France economists noted that financial turmoil and other events can still make it difficult to be simple.

“Both complexity and length increase in periods of crisis and when new monetary policy tools are introduced,” they said. 

–With assistance from Lucy Meakin and Christopher Condon.

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