If the dot chart creates confusion, one option would be to dispense with the exercise altogether. Having evoked Dr. Seuss earlier, I can imagine his bidding the dots farewell with some ditty like this:  2  “Standard Deviation of the Dots in the Dot Chart,” by Torsten Slok, Deutsche Bank Research, April 23, 2014. BIS central bankers’ speeches  7  Yet expressing the FOMC participants’ perceptions of, and possible reactions to, an assortment of future scenarios – however often the committee’s composition may change – does strike me as having some merit, if only to give markets insight into how the central bank might react under different circumstances. In the parlance of the trade, this is called “state-based” guidance. Yet here, too, we have struggled. For example, until two meetings ago, we used an unemployment figure of 6½ percent as a point sometime after which we would begin to consider pulling back on monetary accommodation, then decided this wasn’t quite the ticket. This may be a little more inside baseball than you expected to hear today, but here’s the point: Expect the Fed to continue refining its communications. We are getting better at it. But to invoke the immortal words from the chain gang captain portrayed by Strother Martin in the 1967 movie Cool Hand Luke: “What we’ve got here is failure to communicate.” We are working on it so that you and other bankers, market operators, businesses and consumers will develop the best possible insight into how your monetary authority will behave.
Some critics have maintained that, in the May 2008 issue of Financial Stability, the Central Bank contradicted its own knowledge of the state of the banks – or even that it did not know any better. This is untrue. The report examined in a transparent manner the financial system’s weaknesses, as well as its strengths. The developments in the global arena since the spring of 2008 rendered the risks mentioned in Financial Stability far more serious than was foreseen. In its monetary policy statement in July 2008, the Board of Governors said inter alia that “Iceland’s commercial banks play an important role in maintaining confidence in the financial system. Under the current global financial market conditions, they must protect their liquidity and capital position, seek all possible ways to reduce their need for foreign credit, and adapt the scope of their operations to dramatically changed circumstances.” Throughout 2008, the Central Bank of Iceland focused increasing attention on the developments and operational outlook at the nation’s financial institutions – particularly its large banks. Among other things, it monitored their liquidity much more closely and frequently than is stipulated in the Bank’s rules on liquidity requirements, and considerably more than had been customary. The Central Bank met with leaders from the large commercial banks and reviewed various aspects of their operations, requesting information on and explanations of the developments in certain areas, such as liquidity, funding, changes in lending and deposits, asset sales, etc.