Anthony Hilton: Central banking becomes theatre

The chairman of the US Federal Reserve, Ben Bernanke, was in London earlier this month to give a lecture at the London School of Economics.

Much of it, understandably, was devoted to an analysis of the banking crisis, what has been done, what might still need to be done and what weapons the authorities still have at their disposal. And it was in this section that he made an interesting observation. Noting that the scope for interest rate cuts virtually disappears the closer rates get to zero, he said the Federal Reserve still had powerful tools at its disposal - one of which was communication.

His predecessor Alan Greenspan used to rejoice in being as obtuse as possible - he took it as an article of faith that he should never be clear and he thought that keeping the markets guessing about his intentions was a necessary part of his ability to operate.

With a heritage like this, for Bernanke to talk of communication as a weapon is quite a shift. Bernanke was, however, promising rather less than appeared at first sight. On closer examination, what he had in mind was an occasional comment from the Federal Reserve Bank on whether low interest rates were likely to persist 'for a long time', or were likely 'soon to be reversed'.

The Bank of England and the Fed have in fact been doing this for years.

The City's obsession with monthly interest rate moves is nonsense in terms of economic theory that says it takes two years for changes to work through the system and deliver change. But movements in rates do change the public's expectations and level of confidence in the short term - which leads us into central banking as theatre. We have got almost to the point where the effect on confidence and the public mood matters more than the act itself. But this being the case, central bankers and the Government might benefit from professional help in getting the message across. There is scant evidence that the public are anything other than confused and scared by the current pattern of communication from government.

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