Fed credibility enhanced when public finds policymakers relatable

Q. You've made a case for diversity, in particular among Federal Reserve or central bank policymakers. How do you use diversity to reach a broader audience?

There are many important reasons to support diversity in monetary policy. If you think about potentially including different backgrounds and experience in the process—to potentially mediate concerns of group-think—these are important kinds of considerations that have been in the forefront over the past couple of years.

Francesco D’ Acunto from Cornell University and Andreas Fuster, who is at the Swiss Finance Institute in Lausanne, Switzerland, and I document that women and Black survey participants were way more supportive when seeing a forecast with a female Fed regional president or with a Black male president [delivering the information]. That (result) was relative to seeing the same forecasts in our randomized controlled trials but with different policymakers associated with those forecasts.

So, then we tried to dig a little bit into the mechanisms and channels. And what we could document is that women and Black Americans actually became way more interested in gathering even more information about monetary policymaking and were [becoming] more trustful of the institution. So, for example, we try to elicit to what extent do you think that the Federal Reserve cares about the well-being of all Americans, including people like yourself?

And we show that before the respondents knew that women and Black Americans are part of the institution, women and Black Americans had substantially lower levels of trust relative to white male survey participants. However, when they learn that, like in our case in our survey experiment, Mary Daly, the president of the San Francisco Fed, was actually part of the discussion and had a seat at the table, they become substantially more trusting of the institution.

Q. So, if gender and ethnic relatability have a broad enough impact on how people view the Fed, could it impact the tractability of monetary policy and institutional credibility?

That's definitely a super important point. Of course, we care a lot about inflation being too high. But if you think back a couple of years, we had exactly the opposite problem. We were in a period where we had low inflation. We were stuck near the effective lower bound on policy rates [a zero policy rate].

 

“Of course, communication can only be effective when it reaches people. But if people have no trust and are not even interested in gathering information about monetary policy, then the policy itself is kind of doomed to fail.”

        

One way to potentially stimulate the economy and actually conduct monetary policy is through communication. Many of us are now familiar with the spread of “forward guidance.”

Of course, communication can only be effective when it reaches people. But if people have no trust and are not even interested in gathering information about monetary policy, then the policy itself is kind of doomed to fail.

Q. How do these mechanisms work outside the Fed?

From some German data, we know that when it comes to financial advice, we tend to see that women  invest too little in the stock market. On average, they might save too little for retirement. But actually, what this research has shown is that if the financial adviser is female and, in particular also if she’s like the client … [female respondents] were substantially more likely to invest in the stock market.

In the U.S., research has documented that African Americans are way more likely to go to the doctor for preventive care if the doctor is African American. And, while women tend to have a lower probability of surviving from a heart attack, researchers showed in a randomized, controlled trial in Oakland [California] that if women were paired with female doctors, their survival rate actually surpassed the male patient survival rate. So, indeed, across different fields, diversity can play an important role.

Q. If it really matters who delivers the message, does that mean it's not enough to just have good policy?

I think good policy is a necessary condition, but it's not sufficient. You do have to think carefully about who you choose as a messenger.

I'm originally from Germany, and I spend quite a bit of time over the summer at the European Central Bank (ECB). It's always interesting to see that in a currency union, you also face different aspects of potentially matching recipient and message. For example, it's very common that Isabel Schnabel, the female board member from Germany, is very active when it comes to policy communication in German media versus way less press in the Italian media.

Back in the day, when Mario Draghi was the ECB president, he was oftentimes targeted speaking to the Italian audience. You need to think who the message is intended to reach; that definitely plays a role now.

One shortcoming of our work is that we could not say anything about the optimal degree of diversity when maybe there is even too much diversity in the sense that at some point, if there were just female members on the FOMC, what would be the repercussion potentially on the male population in the U.S. These are important things that hopefully future research can touch upon.

Q. In the Eleventh Federal Reserve District, we have a rapidly growing population, and we're nearing a Hispanic majority and certainly have a lot of immigrants. What are the implications of your research in terms of incorporating diverse groups as the population changes?

Given the big share of the Hispanic population in the U.S., [it is important] to also directly see whether the presence of Hispanics on the FOMC could actually be important to deliver the message.

But unfortunately, at the time we did the survey, there had never been a member from the Hispanic community present on the FOMC. (Adriana Kugler, a native of Colombia, was sworn in as a member of the Fed’s Board of Governors on Sept. 13, 2023.) So, we couldn't directly test for this mechanism.

Going a little bit out of my comfort zone as an academic and to generalize our findings, I expect that it would be beneficial and helpful if there was some presence of the Hispanic population.

Now, maybe one thing that complicates things a little bit is that the Hispanic population in the U.S. is also heterogeneous, depending on the part of the country. If you look at Florida, you see that Hispanics are maybe more conservative compared with other parts of the U.S. And so, I would have to be a little bit careful in generalizing too much.