CAMBRIDGE – Consider last week’s tale of two central banks. Each is long-established, with influence that extends well beyond its country’s borders, and both are pressed to make delicate judgment calls aimed at continuing to reduce inflation while avoiding undue damage to growth and jobs. In the event, they end up taking very different approaches within 24 hours of each other.
The first protagonist is the Bank of England, which cuts its policy rate by 25 basis points, following a 5-4 vote that reflects the complexity of the underlying economic issues. The other is the US Federal Reserve, which takes pride in forging a consensus and delivering a unanimous vote, only to get battered by analysts and the media in the days following its decision. Which central bank do you trust more with your economic well-being and that of your family and friends?
This is an important question, because trust underpins a central bank’s ability to fulfill its mandate. Much of today’s financial architecture rests on the assumption that central banks are committed to maintaining public confidence in their policymaking. After all, an inflation target must be credible to anchor inflation expectations; and the same goes for forward guidance that is meant to smooth out the bumpiness of policy adjustments over time.
Trust and credibility are supported by offering greater transparency, a process that has evolved over the years into holding regular press conferences and publishing meeting minutes and transcripts. In some cases, the central bank makes quarterly quantitative projections for major policies and economic metrics.
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