LONDON (Reuters Breakingviews) - Honesty is often touted as the best policy. It may be the hardest one for central bankers to adopt. Bank of England Chief Economist Andy Haldane this week told a conference of global rate-setters to speak simply and truthfully to the general public. His advice is laudable but difficult to follow in its entirety.
Clarity is the easier aspiration. Central banks have already come a long way from the days of former U.S. Federal Reserve Chairman Alan Greenspan, who revelled in obfuscation and complexity. But they can do much better. Haldane is one of the best exponents of the new style of talking directly to the public. He deftly mixes plain speaking with the story-telling techniques that he recommended to peers at the conference hosted by the European Central Bank.
Honesty is a tougher proposition. True, the man in the street might have more respect for monetary policymakers if they openly admitted ignorance or past errors of judgement. But financial markets are less forgiving. Investors and traders are more likely to question the wisdom of current policy if rate-setters admit they don’t know why output or inflation is failing to behave as expected. Policymakers who confess they made gaffes in the past will probably have to work harder to justify they aren’t making another one in the present.
Perhaps that is why so few rate-setters are willing to admit that either they or their predecessors have erred. Take the ECB’s decision to raise interest rates in 2011, when the euro zone crisis was still in full swing. Or consider Bank of England Governor Mark Carney’s forward guidance of 2013, which made an overly simplistic link between unemployment and policy rates. The first was reversed and the second abandoned. But neither central bank has ever acknowledged the original decision was a blunder.
Haldane insists there is no dichotomy between acknowledging past policy mistakes and preserving a central bank’s credibility. Central bankers are definitely trying to do the best they can with the incomplete information at their disposal, and all humans make mistakes. Unfortunately, those who rely on an aura of omnipotence to bend financial markets to their will find it hard to admit publicly they are mere mortals.
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