Forward Guidance Still Isn't Working
The Federal Reserve and the European Central Bank are diametrically opposed on the monetary-policy spectrum. The Fed is debating how soon it should start to normalize policy by raising interest rates and unwinding its huge bond-buying program as growth improves; the ECB is only just about to introduce quantitative easing as the euro region threatens to slump back into recession.
You'd never know it from the 9,000-odd words they each employ in the summaries of their most recent policy meetings. That suggests that forward guidance, designed to educate consumers and investors about what's coming next from the unelected guardians of their economies, remains a work in progress. If the concept was working, Fed watchers wouldn't be straining their eyes to see if the word "patient" gets dropped from the outlook, while ECB soothsayers would more easily have spotted such terms as "quantitative easing" and "sovereign debt."
Here are two word clouds, using wordle.net, that visualize each central bank's minutes by increasing the size of frequently repeated words. One uses the minutes of the Fed's January meeting published Wednesday; the other uses Thursday's account of the ECB's gathering of last month. See if you can tell which is which:
In the interest of disclosure, I have removed a handful of giveaways (as well as everyday words including "the" and "as"). The first picture uses the Fed text, but ignores "Federal," "Committee," and "RRP," which refers to a money-market tool exclusive to the U.S. The second features the ECB's words, but with "euro," "Governing," "Eurosystem" and "ECB" deleted.
Without those region-specific pointers, you can't slip a cigarette paper between the words used by the two central banks, even though they are overseeing vastly different economies. That in part reflects the curiously limited vocabulary of central bankers, divorced from the way normal people speak. But it also suggests a willful avoidance of truths prevalent in each one's real economy.
The word "deflation," for example, appears exactly once in the Fed minutes, and even then it's in the context of wages. The ECB mentions deflation five times, but only to deny its likelihood. "Inflation" occurs most often in both texts and, to be fair, they both acknowledge that the trend is slowing rather than accelerating. But it's still odd that deflation remains almost a taboo subject, given that central banks everywhere are slashing interest rates, often to negative values, to prevent persistently falling prices.
More worrying is the fact that employment, probably the highest priority for the citizens and governments of a euro region where 11.4 percent of the population is jobless, gets just four mentions from the ECB. The word occurs more than 40 times in the Fed statement, reflecting the U.S. central bank's dual mandate. Euro policy makers really should be more focused on how to rescue the region from the misery of unemployment.
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