WASHINGTON (Reuters) – Fed's political statements became so complicated after the recession that standard readers of readability suggested that people needed four years of university or more to understand them.
US Federal Reserve Board Chairman Jerome Powell is waiting to testify in a hearing by the Senate Banking and Housing and Urban Affairs Committee on "The Half-Yearly Monetary Policy Report to Congress" on Capitol Hill in Washington, USA February 26, 2019. REUTERS / Jim Young
It is changing under Fed's new leadership, a Reuters analysis has found.
Since Fed Chairman Jerome Powell took the helm in February 2018, statements have grown smaller and opening remarks on the central bank's news conferences have become easier to follow.
While the change in comments reflects Powell's efforts to simplify Fed's communication, less complex statements are partly due to the fact that the central bank phases out the exotic instruments deployed during and after the 2007-09 recession, including bond purchases and forward guidance. about politics, and replace them with more conventional tools.
Although experts say more clarity can help reduce the volatility of the financial market, some of Powell's comments seemed to have the opposite effect, and a sign that is linguistic, also carries risk.
In January, readers needed about three years of college to easily analyze Fed's policy statement, according to the Reuters analysis, which used a standard readability index known as the Flesch-Kincaid class-level formula.
The formula calculates the text's dependence on large words and long sentences. Fed-level reading levels of Fed policy rose after the recession and peaked at around 20 – at the end of 2013 – equivalent to a PhD – as Fed detailed complex tools such as buying government bonds and securities with securities.
The results fell in 2014, the first year under Janet Yellen, Powell's predecessor. During the last three years of the Yell, the averages were around 16, about equal to a four-year university degree.
During Powell, the average has risen to around 15, above a college reading level, but close to scores from before the recession.
Researchers have found evidence in the past that more complex Fed communication led to greater market fluctuations. However, it is not clear whether the latest decline in the statement complexity has improved the public's understanding of Fed action and how financial markets interpret the statements.
"You expect less volatility from a drop in complexity," said Charles Calomiris, an economist and mining expert at Columbia University, referring to the decline in Flesch-Kincaid points identified by Reuters.
However, Calomiris stressed that deciphering market movements and measuring the role played by recent changes in the Fed's language was a complex task.
Market volatility has actually increased in recent months as investors became less secure on the direction of the global economy and the Fed policy.
For example, in December, Powell effectively bailed past the Fed's guidance when he said the Fed's plan to trim bond holdings was on "auto pilot". Nevertheless, stocks are disappointingly disappointing that he did not show more flexibility.
The reading quality calculated by Reuters closely followed those found in a 2016 research paper here from Dallas Fed economists who analyzed policy statements from 1994 to early 2014. They found greater market movements for statements with higher reading points levels.
David-Jan Jansen, economist at the Dutch central bank, found here.pdf evidence of medium-term interest rates was less volatile after easier reading of the Congressional Presidents' evidence.
"It's not just what you say. That's how you say it, Jansen said.
Nevertheless, Jansen and Calomiris both noted a limitation on the readability analysis: It does not consider the meaning of the words being analyzed.
Some researchers try to Doing this by counting word combinations associated with tighter or less monetary policy, this study has focused on larger collections of texts, such as political meetings and speeches from central bankers.
A Fed spokesman refused to comment. While policymakers are trying to formulate the policy statement in languages understood by Wall Street, he formulated his own remarks to be understood more broadly.
"Just say it in a way that is more accessible," Powell said at a meeting with teachers.
Powell's five opening declarations have had an average reading grade of 12, equivalent to the last year of high school in the United States. average about 14 or two years with college.
Powell's opening statement in September, which conveyed the view that the US economy was simply strong and interest rates should rise, was easy enough for a 10-degree US.
However, in January, Powell's opening statement became more complex as he offered more sophisticated views of the economic outlook and explained why the Fed decided to put course increases on hold.
Reporting by Jason Lange; Editing by Dan Burns and Tomasz Janowski