"Did He Just Say That?" — A Critical Look At Central Bank Communication

“This statement confuses more than it clarifies.” 

No, this was not an outsider’s perspective about the recent monetary policy statement of RBI. This was what Jayant Varma, the erstwhile member of the MPC, said in August 2022.

The latest monetary policy announcements, which many believe, were a sort of unprecedented, warranted only as a response to a crisis, have produced less-than-sanguine reactions from the market. Bond yields reacted unfavourably to a barrage of rate cuts, massive release of liquidity through unwinding of some cash reserve ratio, a quick policy stance change and a forward guidance that left everything bare. It was a sort of cognitive dissonance at play, as if the markets suspect that the economy might be treading into difficult times. 

Such are the intentions and the outcomes of central bank actions and communications. 

Then you have this: A wire agency reported Wednesday, quoting a source (?!) that “India's central bank plans to use the cash reserve ratio more frequently to manage liquidity and aid policy transmission, rather than deploying it only during extreme cash swings”. 

Generally, it is believed that such sources are from within. While getting into the merits of this statement is not part of this article, enough to say, such noises beyond the Governor’s statement and interactions on the day of the policy could be avoided.

After all, communication isn’t just a public relations issue for a central bank, especially when it is about monetary policy. Expectations drive investment decisions, bond pricing, wage negotiations, and more. When central banks speak clearly and credibly, they can move economies without moving interest rates. But when communication falters, through vagueness, inconsistency, or tone-deafness, markets overreact or freeze.

Central bankers, once obscure technocrats hiding behind the fortress walls of monetary policy, are now global celebrities. They move markets with a syllable, spark Twitter wars with a semicolon, and make journalists (and sometimes ministers) squirm with carefully calibrated ambiguity. But for institutions meant to exude stability, central banks often turn public communication into a kind of interpretive dance, one that markets, media, and mere mortals struggle to follow. 

The goal of central bank communication is noble: to provide transparency, guide market expectations, and reduce uncertainty. But it often feels like watching a magician pulling policy rabbits out of the hat while yelling, “Forward guidance!”

Consider Alan Greenspan, the former U.S. Federal Reserve Chairman, a man who could issue a full-page statement and still say absolutely nothing. He once famously remarked:

“If I seem unduly clear to you, you must have misunderstood what I said.”

Greenspan elevated deliberate opacity into an art form. One may respectfully call it “constructive ambiguity”….but the art has to be finely used and not meant for everyone…so is “transparency”. Traders would spend hours decoding whether "considerable period" meant three months or eternity, and journalists speculated on how much coffee he had before saying "measured pace" instead of "gradual."

It was like central bank ASMR for economists.

Often, the art and occasional disaster of central bank communication, focusing on how miscommunication, intentional or accidental, has led to market panic, misinterpretation, and monetary memes.

Case in point: the "taper tantrum" of 2013. Fed Chair Ben Bernanke casually mentioned in testimony that the Fed might "taper" its asset purchases if the economy improved. Harmless, right? Wrong!

Wall Street reacted as if he’d announced interest rates would be set by throwing darts at a board. Yields surged, stocks dropped, and emerging markets panicked. It was like yelling "fire" in a theatre while holding a candle.

The communication failure wasn’t in what Bernanke said, but how markets interpreted it. His phrasing lacked the comforting tone markets crave, like a bedtime story: "Don’t worry, the taper won’t bite." 

But modern markets are a combination of complex behavioural dynamics coupled with algorithmic game plays. And markets strive to engage central banks with a purpose. What they do ultimately might be different from what central bankers in turn would have thought. Being humans with media glare difficult to brush aside, it is important for central bankers to distinguish between the “urge” to talk and the “need” to talk; that’s all about central bank communication.

In 2022, for example, Jerome Powell, after months of downplaying inflation, suddenly turned hawkish. “Inflation is not transitory,” he declared, as if it were Voldemort returning. The abrupt pivot caused a re-pricing frenzy in every asset class. It was monetary whiplash.

What is the right dose of communication for central bankers? History is replete with central bankers who were aloof — triggering comments like “Where’s the Governor?” instead of “Where’s Waldo?” — on the one extreme to those who might talk not to guide the markets but to hear themselves speak, on the other. And there are some who do not carry on with their “commitments” — for instance take the case of Governor Andrew Bailey (2021) told markets to “prepare for rate hikes.” The market prepared. The BoE didn’t deliver. That’s like shouting “surprise party!” and then not showing up.

Then we have this interesting beast called “Forward Guidance”; the policy that’s always in beta.

Central banks use forward guidance to signal future moves. It’s supposed to anchor expectations. But often, it reads like astrology:

"The Committee anticipates that conditions may warrant a potential increase in rates sometime over the medium term, contingent on incoming data evolving in a manner broadly consistent with our outlook...".

Translation: We might do something, unless we don’t, in which case we’ll tell you later, maybe.

The Fed in the 2010s gave so much guidance, markets felt like they were being haunted by spreadsheets. “We’ll raise rates when unemployment hits X% and inflation is Y%.” It felt like a science experiment — until they moved the goalposts mid-game.

Result? More confusion than clarity.

And in some cases, like the recent RBI’s monetary policy — it is straight forward and unambiguous, only leaving a doubt in the minds of the markets whether this is all the end of this year’s policy action and nothing more to expect! After all, markets relish if something is always left uncovered.

While it is true that the RBI, to its credit, has improved communication in recent years, it has also had its "oops" moments. In 2020, when it surprised markets by not cutting rates despite signalling a dovish stance, traders reacted like they had just walked into a vegetarian buffet at a steakhouse. There were also cases when the RBI’s monetary policy statement and press conference appeared slightly out of sync, like reading two versions of a breakup letter: one emotional, one legal.

But then who said it is easy? Sometimes, central banks communicate clearly — and the market still hears what it wants to hear.

Here are some examples of what transpired to be central bank miscommunication:

Memes Galore
In the age of social media, central bankers are now content. Powell has fan accounts, Christine Lagarde is the subject of Eurozone Twitter debates, and an earlier RBI governor was once voted India's "sexiest central banker." 

That’s a low-bar contest, but still.

One viral meme had Powell as Thanos: “I am inevitable,” snapping his fingers to hike rates. Another showed Lagarde as the Sphinx, with markets trying to decode her riddles.

Central banks wanted transparency. What they got was TikTok. That is zeitgeist!

Effective central bank communication is a delicate balance: between being clear but not too revealing, firm but not frightening, boring but not baffling. Like a dinner guest who brings dessert and then leaves quietly.

When done right, it smooths expectations, anchors behaviour, and enhances credibility. When done wrong, it creates market chaos, institutional distrust, and meme fodder for eternity. The line that divides is subtle and hence needs dexterity.

Another aspect is carefully crafting and sticking to hierarchy of communication channels within the central bank…too many speaks and “sources” (sometimes such source implants may be by design and part of the toolkit) could often make the desired policy outcomes sub-optimal

So next time a central banker opens her mouth and your Bloomberg terminal goes red, remember: it's not just rates that move markets. Sometimes, it's just one poorly chosen adjective.