One Simple Change to Improve Fed Communication

Tim Mahedy is the CEO and Chief Economist at Access/Macro, a macroeconomic and analytics consulting company. Before starting Access, Tim worked on Wall Street, at the International Monetary Fund, and did two tours at the Federal Reserve Bank of San Francisco, first as a forecaster and later as the chief of staff to the president. He is regularly cited by the media, and his work remains influential with policymakers.

The Fed’s primary forecast tool has an interpretation problem. The Summary of Economic Projections (SEP), which Fed officials release four times a year, is being misinterpreted by the public, which is boxing the Fed into short-term preset policy paths at a time when strategic ambiguity would be a better tactic for handling today’s toxic mix of applied political pressure, historical high federal policy uncertainty, and the noisy signal arising from real-time economic data.

For policy to remain effective in the new world, especially one where politicians overtly seek to control monetary policy, the Fed will need to think creatively about how to increase transparency while retaining optionality. That last point is critical in a world where every economic data release can be best described as a Rorschach test, and data-dependent policymakers often sound like they’re reacting to every swing in the numbers.

The good news is that getting started won’t take much work. In fact, Federal Open Market Committee (FOMC) Chair Powell previewed the solution at last November’s post-FOMC meeting press conference when he outlined a set of high-level scenarios focused on how the FOMC would react to varying economic conditions. It may have been an offhand comment, as scenarios have not been outlined in the same way since. If so, it would be an unfortunate missed opportunity, as these scenarios would help alleviate the public’s misinterpretation of the Fed’s SEP.

Delphic vs. Odyssean Communication

In an important 2012 research paper, Chicago Fed President Charlie Evans and co-authors examined various types of forward guidance (telling people what you’re planning to do before you do it). They laid out two types: Delphic and Odyssean. Like the Oracle of Delphi, Delphic forward guidance is an amalgamation of cryptic statements, intentionally left open to interpretation. Odyssean guidance is characterized by explicit, self-binding commitments, much like Odysseus tying himself to the mast of the ship to avoid the Sirens' call.¹ Both are important and were used by policymakers in the aftermath of the Global Financial Crisis (GFC).

The difference between the two can be boiled down to the level of future commitment that policymakers are willing to agree to. Tools like date-based forward guidance, where the Fed says it’ll maintain the current stance of rates until a specific date, are Odyssean communications. Policymakers explicitly pick a date and commit to not changing policy until that time.

Delphic guidance is a little harder to wrap your head around, but you’ll know it when you see it. For example, in the January 2022 FOMC statement, the Committee said, “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”² That’s conditional Delphic guidance. The conditions are inflation above target and a strong labor market. When those conditions are met, the Fed will raise rates. However, importantly, it does not specify a date at which the FOMC will raise rates. That would be date-based Odyssean guidance.

The Fed deployed a series of Delphic and Odyssean communication tools during the post-GFC economic expansion that focused on raising inflation to the Fed’s 2% target, but few have lasted as long or had as significant an impact as the SEP.

Explaining the SEP Has Become a Thorn in the FOMC’s Side

Inflation remained stubbornly low in the years following the GFC. To address these issues, FOMC Chair Bernanke coaxed the Committee to release more detailed forecasts at more regular intervals, thereby increasing transparency around FOMC decisions. The SEP has evolved since then, but it remains a key policy tool that is deployed four times a year to great fanfare and misunderstanding. 

The document contains forecasts for GDP, unemployment, inflation, and policy rate. Each of the 19 FOMC members, seven Governors on the Board of Governors, and 12 regional bank presidents is asked to submit their detailed forecasts at the FOMC meeting that comes at the end of every quarter. Those forecasts are collected, and summary statistics are tabulated: the median, central tendency, and range are calculated and reported for each economic variable.

The SEP was designed to be a powerful Delphic communication tool. It provides a set of forecast statistics summarizing policymakers’ views on where the economy and rates are headed, but it does not specifically bind the FOMC to act on a specific date or move rates by a specific amount. That’s an important distinction, as Odyssean communication could lock monetary policymakers into a path that isn’t suited for future economic conditions. 

As Evans and his co-authors point out, without conditional forward guidance, Odyssean communications posed a risk to the Fed’s price stability mandate during the post-GFC expansion.³ The concern was that using explicit commitments to keep rates lower for longer would erode the Fed’s credibility to fight inflation, as the public internalized the Fed’s message that it wanted inflation to go higher. It also raised the risk that the Fed would miss a rapid and persistent rise in inflationary pressure. Those concerns were tested in 2021 and 2022 as inflation jumped to a four-decade high. 

Today, core PCE inflation is still much closer to 3% than to the Fed’s 2% target. But that hasn’t yet harmed the SEP’s or Fed’s credibility.

Delphic Communication Devices Have an Odyssean Interpretation Problem

People crave certainty. While the Fed has long since abandoned explicit Odyssean communication, such as date-based forward guidance, market participants who want the comfort of surety have come to interpret Delphic guidance as Odyssean in the short run. That is certainly true for the SEP.

In a 2007 speech, then FOMC Chair Ben Bernanke announced that the FOMC would “…provide more-timely information about the evolving outlook…” by functioning “…as a forecast, as a provisional plan, and as an evaluation of certain long-run features of the economy.”⁴ Those are Delphic communication buzzwords. However, despite the best efforts of FOMC members, the summary statistics, especially the medians, are regularly viewed as a consensus forecast and FOMC commitment that it will follow the rate forecast exactly if conditions play out close, or sometimes not even all that close, to the projections. The issue is compounded in today’s volatile world, where economic models aren’t functioning as they used to, the data is sending mixed signals, and the Fed’s mandate for maximum employment and stable prices appears to be in conflict. 

Markets and the public, yearning for clarity, consistently overinterpret what the FOMC is trying to communicate in the SEP. That puts policymakers in a bind. If conditions change suddenly, they must either stick to the previously outlined course, which usually aligns with market and Main Street expectations, or risk surprising the public during a delicate economic period, the opposite of what forward guidance is intended to do.

Yet despite the SEP’s issues, we can’t discard it. Markets and the public would revolt, and reducing transparency would give the administration yet another avenue to dangerously attack the Fed’s independence. The SEP must stay, but policymakers must also find a way to create more optionality for their rate strategy in a more volatile and unpredictable world.

Start With a Simple Fix

As noted in the opening, Powell already previewed the solution at the November 2024 press conference. In response to a question about what would make the FOMC cut in December of that year, Powell outlined a few very high-level scenarios – no numbers – with how the FOMC would respond to different economic scenarios. It was a brief response, without specifics, but it garnered significant media attention and effectively illustrated the Fed’s rationale. 

While there was no SEP at the November 2024 meeting, it’s not hard to imagine how using more explicit scenarios with high-level logic would help mitigate the Odyssean interpretation of Fed forecasts. As he always does, the Chair could remind the public that the SEP is not a consensus FOMC forecast and hammer the point home with one or two alternative scenarios. That would help to shift the focus away from the median forecasts and provide more cover for policymakers to wait and see how things develop as the public digests a more complicated policy outlook.

This is in line with suggestions from former Fed Chair Ben Bernanke, which he sketched out in a Brookings paper in May of this year. He argued that the SEP has “…significant conceptual weaknesses…” and he outlined a detailed plan focused on a new quarterly document that would contain Fed Board staff projections. The paper also noted ways in which the FOMC could add more transparency to the SEP process.⁵ Policymakers would implement a more official way of providing scenario analysis, and would be asked to choose between pre-packaged alternative scenarios – another way of adding information while encouraging a Delphic interpretation of the SEP.

Act Now

Bernanke’s paper is a comprehensive examination of monetary policy communication, with a set of detailed policy and communications suggestions. But there is one thing Chair Powell could do in two weeks that would immediately help. He could run through a set of high-level alternative scenarios at the press conference. It would require minimal work, but would provide the public with greater transparency and afford the FOMC more optionality as it confronts intense political pressure, uncertain federal policies, and noisy economic data.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1] Campbell, Jeffrey R., Charlie L. Evans, Jonas D. Fisher, and Alejandro Justiniano. “Macroeconomic Effects of Federal Reserve Forward Guidance.” Brookings Papers on Economic Activity, Spring 2012 (March 2012).

^[2] Board of Governors of the Federal Reserve System. “January 2022 FOMC Statement.” Press Release, January 26, 2022. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126a.htm.

^[3] Campbell, op. cit.

^[4]  Bernanke, Ben S. “Federal Reserve Communications.” Speech. The Cato Institute in Washington, DC, November 14, 2007. https://www.federalreserve.gov/newsevents/speech/bernanke20071114a.htm.

^[5] Bernanke, Ben. “Improving Fed Communications: A Proposal.” (Washington, DC), Hutchins Center Working Paper #102 (May 2025). https://www.brookings.edu/articles/improving-fed-communications-a-proposal/.

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