INSUBCONTINENT EXCLUSIVE:
WASHINGTON: The Fed's policy statements grew so complicated after the recession that standard gauges of readability suggested people needed
four years of university or more to understand them.
That is changing under the Fed's new leadership, a Reuters analysis has found.
Since
Fed Chairman Jerome Powell took the helm in February 2018, statements have grown less complex and opening remarks at the central bank's news
conferences have become easier to follow.
While the change in remarks reflects Powell's effort to simplify the Fed's communications, less
complex statements appear at least in part to result from the central bank phasing out the exotic instruments deployed during and after the
2007-09 recession, including bond purchases and forward guidance on policy, and replacing them with more conventional tools.
While experts
say more clarity might help reduce financial market volatility, some of Powell's comments appeared to have had an opposite effect, a sign
being plain-spoken also carries risks.
In January, readers needed about three years of college to easily parse the Fed's policy statement,
according to the Reuters analysis, which used a standard readability index known as the Flesch-Kincaid grade-level formula.
The formula
calculates a text's reliance on big words and long sentences
Reading-grade levels for Fed policy statements rose after the recession and peaked in late-2013 at around 20 - equivalent to a PhD - as the
Fed detailed complex tools like purchases of government bonds and asset-backed securities.
The scores declined in 2014, the first year under
Janet Yellen, Powell's predecessor
During Yellen's last three years the scores averaged around 16, roughly equivalent to a four-year university degree.
Under Powell, that
average has eased to about 15, above a high-school reading level but close to scores from before the recession.
Researchers have found
evidence in the past that more complex Fed communications led to larger market swings
It is not clear, though, whether the recent drop in statement complexity has improved the public's understanding of Fed actions and how
financial markets interpret the statements.
"You would expect less volatility from a drop in complexity," said Charles Calomiris, an
economist and text mining expert at Columbia University, referring to the drop in the Flesch-Kincaid scores identified by Reuters.
Calomiris
stressed, however, that deciphering market movements and measuring what role recent changes in Fed's language played was a complex
task.
Market volatility has actually increased in recent months as investors grew less certain about the direction of the global economy and
Fed policy.
For example, in December, Powell effectively reiterated past Fed guidance when he said the Fed's plan to trim bond holdings was
Still, stocks sank on disappointment that he did not indicate more flexibility.
The reading grades calculated by Reuters closely tracked
those found in a 2016 research paper by Dallas Fed economists who analysed policy statements from 1994 through early 2014
They found larger market moves after statements with higher reading grade levels.
David-Jan Jansen, an economist at the Dutch central bank,
found evidence that medium-term interest rates were less volatile after easier-to-read congressional testimonies by Fed chairmen.
"It's not
It's how you say it," said Jansen.
Yet Jansen and Calomiris both noted one limitation of the readability analysis: It does not consider the
meaning of the words being analyzed.
Some researchers are trying to do this by counting word combinations associated with tighter or looser
This research has focused on larger collections of texts, such as policy meeting minutes and speeches by central bankers.
A Fed spokesman
6 that while policymakers try to craft the policy statement in language understood by Wall Street he fashioned his own remarks to be
understood more broadly.
"You just have to say it in a way that's more accessible," Powell said at a meeting with educators.
Powell's five
opening statements have had an average reading grade level of 12, equivalent to the last year of US high school
Yellen's last five opening statements averaged about 14, or two years of college.
Powell's opening statement in September, which conveyed
the view that the US economy was simply strong and interest rates were set to rise, was easy enough for a US 10th-grader.
In January,
however, Powell's opening statement got more complex as he offered more nuanced views on the economic outlook and explained why the Fed
decided to put rate increases on hold.
