It was not that long ago that central banks were a byword for secrecy. The workings of monetary policy were shrouded in opacity, and the Bundesbank even took pride in how it was able to surprise the market.
Not any more. Central banks have embraced the mantra of transparency. They not only announce what they have done, they also display missionary zeal in explaining the whys and the hows of their operations. They seem to compete in the number of speeches given, and there is widespread agreement on the need to educate the public in their art.
However, central banks have found that once they start to reveal all, the public demands ever more. Recently, it has been the Federal Reserve which seems to be coming in for the most criticism, with much adverse comment at their recent symposium at Jackson Hole, and several Fed presidents agonising in public on just what transparency means. This is ironic, because for many the Fed is the very model of a modern transparent central bank, and it is used as the yardstick by which to judge others, usually to their detriment. The ECB, for one, has been under attack almost since its establishment because it is “not as open as the Fed”.
No-one criticises the Fed for the way in which it explains what it has done. It is excellent at detailing its monetary policy decisions and announcing policy changes. If transparency was only about making public your actions, the Fed would be beyond reproach. But critics claim that this is only half the picture: the Fed never explains what it is trying to achieve, or the methods and rules it uses to decide policy. This is contrasted unfavourably with other central banks, many of whom have a public, quantified target for inflation and even reveal to a certain extent how they make their decisions.
In truth, the Fed has a problem here. Unlike many central banks, who are dedicated solely to the pursuit of low inflation, it is mandated by Congress to pursue multiple objectives. In the words of the Federal Reserve Act, the Fed must “promote effectively the goals of maximum employment, stable prices and moderate long term interest rates”. But the Act does not quantify what these terms mean. And, faced with the challenge of hitting multiple targets with just one policy instrument (short term interest rates), nor to date has the Fed.
Much of the time, that has not mattered. When inflation was high, it was clear that it needed to be reduced even without explaining precisely how many percent increase in the CPI qualified as “stable prices”. But with inflation now low, the lack of a numerical target is felt by some to be a weakness.
Paradoxically, it may also show the Fed’s strength. As an established central bank with an excellent reputation, it can draw on the market’s confidence in its record of success. Newer central banks, which still have to establish their reputation, do not have this luxury, and need hard quantified targets to demonstrate their earnestness.
Maybe also, it comes from differences in society. The Fed operates in a common law jurisdiction, where those in authority are typically given discretion. Other more rules-based societies, for example the European Union, prefer more formal frameworks.
Ultimately, a central bank reflects the society that creates it. In that light, the Fed’s openness, but also its current public search for self-improvement, may not be such a surprise.