Musalem Warns Too Quiet a Fed Could Raise Rates and Volatility

St. Louis Federal Reserve President Alberto Musalem has cautioned that scaling back how much the US central bank explains its decisions could push interest rates and inflation higher and make them more volatile, if households and businesses are left guessing how policymakers would respond to changing economic conditions.

In remarks prepared for an event at the London School of Economics, Musalem said central banks do not need to commit to specific rate paths — a practice that can create its own difficulties — but they should not abandon the conversation entirely. At a minimum, he argued, they should offer a framework that allows the public to understand how policymakers will react as the economy evolves.

His comments come as Fed Chairman Kevin Warsh, who took over the institution in May, has established a task force to recommend changes to the central bank's communications. Warsh has said he believes the Fed's messaging has become too freewheeling, and has cited as a guiding principle that a quieter, more purposeful Fed would deliver better monetary policy.

Musalem pushed back on the idea that silence is the safer path. A central bank that fails to explain how and why it makes decisions leaves the public to speculate, he said, which adds an uncertainty premium and ultimately translates into higher borrowing costs for companies and households. It also raises the risk of inflationary or even deflationary spirals in which public behaviour becomes self-reinforcing.

Speaking too little, he added, also raises questions about the Fed's democratic accountability. A predictable and clearly explained framework is not a constraint on a central bank, Musalem said, but part of what makes an institution run by unelected officials democratically legitimate.

He framed the choice facing policymakers not as one between noisy overpromising and stoic silence, but between leaving the public to guess how the central bank thinks and telling them.