Fed’s Musalem warns against central bank silence amid volatility risks

Investing.com -- Federal Reserve Bank of St. Louis President Alberto Musalem said Tuesday that reducing central bank communications too much could result in higher and more volatile interest rates and inflation. Speaking at a London School of Economics event, he warned that when the public and businesses must guess how the Fed will react to different economic developments, uncertainty increases.

Musalem said central banks do not need to make specific promises about interest rates, but "should also avoid exiting the conversation altogether." He said the Fed should at minimum provide a framework that allows households and businesses to understand how central bankers will respond as economic conditions change.

Fed Chairman Kevin Warsh, who became head of the central bank in May, established a task force to review the Fed's communications practices. Warsh has expressed concern that communications have become too freewheeling. He has stated that "a quieter Fed, more purposeful in its communications" would improve monetary policy.

Musalem argued that "a central bank that does not explain how or why it makes policy decisions leaves the public to guess" about policy choices. This uncertainty adds risk premiums and leads to higher interest rates for businesses and households. He said it also increases the risk of inflationary or deflationary spirals where public behavior becomes self-reinforcing.

Musalem added that insufficient communication raises questions about the Fed's democratic accountability. He said unelected officials running the institution need transparency to maintain democratic legitimacy.

"The communications choice before us is not between noisy overpromising and stoic silence. It is between leaving the public to guess how the central bank thinks and telling them," Musalem said.

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