Don’t Rely on the Media to Transmit Fed Speak

Since 2009, the Federal Reserve has regularly announced its inflation targets, effectively telling the world whether prices for US goods will be higher or lower in the future. Such openness is necessary, the Fed has explained, to influence constituents’ spending decisions as a means to benefit the broader economy. 

The public, however, has not gotten the message. Many Americans still exhibit a profound lack of awareness about inflation and the policies meant to guide it, according to research by University of Texas at Austin’s Olivier Coibion, University of California at Berkeley’s Yuriy Gorodnichenko, and Chicago Booth’s Michael Weber.  

The study relies on a survey of about 83,000 households, the Chicago Booth Expectations and Communication Survey, created in cooperation with Nielsen. Its design and participants mirror the closely watched University of Michigan Surveys of Consumers and the New York Fed Survey of Consumer Expectations.

Almost 40 percent of the respondents in the Chicago Booth survey estimated the Fed’s inflation target at 10 percent or more, a level high enough to call a crisis in most developed countries. (The Fed’s inflation target is 2 percent, and inflation has averaged around 2 percent over the past two decades.) Barely half of respondents gave a number between 0 and 5 percent.

Why are so many people grossly misinterpreting the Fed’s intentions?

The researchers find that how the Fed distributes its messages plays a key role in how the public responds. They argue that the Fed could dramatically influence household inflation expectations with simpler messages, such as a single sentence stating its inflation forecast, delivered directly to consumers. But when Fed announcements are filtered through popular media—the way most Americans hear from the institution now—those messages do little to change minds, the study finds. Moreover, should the Fed move its messaging to Twitter? The researchers also find most Americans no longer read traditional newspaper articles and  instead consider social media a credible source of news about the economy.

Fed speak beats USA Today

With each of the Federal Open Market Committee’s eight annual meetings, the Fed issues a wordy statement that includes its new, or unchanged, federal funds rate and its inflation target. The announcement explains the reasoning behind the numbers, often using standard industry phrases such as “risks to the economic outlook appear roughly balanced” and “the stance of monetary policy remains accommodative.” 

While anyone can read FOMC announcements online, the US government traditionally relies on the popular press to turn this notorious Fed speak into digestible public-service messages. For example, USA Today’s translation of the Fed’s statement describing its “balanced” and “accommodative” monetary policy read: “Citing a brighter economic outlook, the Federal Reserve raised its key short-term interest rate Wednesday but maintained its forecast for a total of three hikes this year amid still-modest inflation.” The article further explains that the federal funds rate rose to 1.75 percent from 1.5 percent, and that the change would increase interest rates for credit cards, mortgages, and other loans.

The Chicago Booth survey, given in May/June, September, and December 2018, asked participants to state the rate of inflation for the past 12 months and to predict the level of inflation for the following 12 months. Respondents also estimated the Fed’s inflation goals and provided their own expectations about unemployment.