Policymakers' Uncertainty – Felix Neubergh Lecture 2023

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Anna Cieslak is an Associate Professor of Finance at Duke University's Fuqua School of Business, working at the intersection of asset pricing, macroeconomics, and monetary economics. Her agenda spans two related domains: the dynamics of interest rates and the interactions between central banks and financial markets. She has recently focused on central bank communication, particularly understanding the channels through which the Federal Reserve impacts financial markets. Her research has been published in academic journals such as the Journal of Finance, the Review of Financial Studies, and the Journal of Financial Economics and featured in news outlets such as the WSJ and the Economist.

Anna Cieslak describes the lecture as follows:

Alan Greenspan famously said, “(...) uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape" (Greenspan, 2004). Yet, despite the ubiquitous emphasis on uncertainty in central bankers' speeches and statements, we know little about how policymakers' uncertainty and, more broadly, their beliefs about higher-order moments of economic outcomes affect policy decisions. How uncertainty impacts central bank decision-making evokes particular relevance today in the face of the recent inflation surge and uncertainty surrounding its path.

In this lecture, I summarize my recent research on this question. In the work jointly conducted with Hansen, McMahon, and Xiao, we evaluate how uncertainty affects policy in the context of the decision-making by the Federal Open Market Committee (FOMC). A simple theoretical framework illustrates how the Fed-driven uncertainty introduces a wedge between the standard Taylor-type policy rule and the optimal decision. Using internal Fed deliberations, we provide the first quantification of the types of uncertainty that the Fed perceives and their effects on the policy stance. The FOMC members' uncertainty about inflation strongly predicts a more hawkish policy stance that cannot be explained either by the internal Fed's forecasts or by the measures of public uncertainty. In contrast, policymakers' uncertainty about growth has no impact on policy decisions beyond these standard controls. Consistent with a model of inflation scares, policymakers' inflation uncertainty reflects their constant worries about losing the nominal anchor. We argue that the desire to maintain inflation credibility is an important driver of the FOMC's decisions and provide evidence from the FOMC transcripts consistent with this channel.

You can find Anna Cieslak's research and vitae here.