You no longer need a PhD to read the Fed's statements

WASHINGTON (Reuters) – The Fed's policy statements were so complicated after the recession that standard readability indicators suggested people needed four or more academic years to understand them.

According to the new Reuters analysis, this situation is changing under the new direction of the Fed.

Since Fed Chairman Jerome Powell took the helm in February 2018, the statements have become less complex and the opening remarks at the central bank's press conferences have become easier to follow.

While the change in remarks reflects Powell's efforts to simplify the Fed's communications, less complex statements appear to result in part from the fact that the central bank has phased out exotic instruments deployed during and after the 2007-09 recession, including bond purchases and policy, and replace them with more conventional tools.

Experts believe that more clarity could help reduce financial market volatility, but some of Powell's comments seemed to have had the opposite effect, a sign clearly says that also presents risks.

According to Reuters analysis, readers needed nearly three years of college education in January to easily analyze the Fed's statement, which used a standard readability index, the Flesch-Kincaid formula.

The formula calculates the dependency of a text with big words and long sentences. The reading levels of the Fed's economic policy statements increased after the recession and reached end-2013 around 20, the equivalent of a doctorate, while the Fed detailed complex tools such as the purchases of government bonds and asset backed securities.

Scores declined in 2014, the first year under Janet Yellen, Powell's predecessor. Over the past three years, Yellen's average scores were about 16, which is roughly equivalent to a four-year university degree.

Under Powell, this average was reduced to about 15, above the high school reading level, but close to the pre-recession results.

Researchers have proven in the past that the Fed's more complex communications have led to greater fluctuations in the market. However, it is unclear whether the recent drop in the complexity of returns has improved public understanding of the Fed's actions and the way financial markets interpret returns.

"You would expect less volatility due to a drop in complexity," said Charles Calomiris, an economist and text analysis expert at Columbia University, citing the decline in Flesch-Kincaid scores identified by Reuters.

Calomiris, however, pointed out that the task of deciphering market movements and measuring the role of recent changes in the Fed's language was a complex task.

Market volatility has actually increased in recent months, as investors are less certain about the direction of the global economy and Fed policy.

For example, in December, Powell effectively reiterated the Fed's earlier forecast when he said his plan to reduce bond holdings was based on an "autopilot". Nevertheless, stocks fell, disappointed not to have indicated more flexibility.

The reading scores calculated by Reuters closely followed those found in a research paper published in 2016 by Dallas Fed economists who analyzed the policy statements from 1994 to early 2014. They found more market movements. important after statements with higher reading levels.

David-Jan Jansen, economist at the Dutch central bank, finds here.pdf evidence that medium-term interest rates were less volatile after the Congress's easier-to-read testimonies by Fed presidents .

"It's not just what you say. That's how you say it, "said Jansen.

However, both Jansen and Calomiris have identified a limitation of the readability analysis: it does not take into account the meaning of the words analyzed.

Some researchers try to do this by counting combinations of words associated with a tighter or more flexible monetary policy. This research focuses on larger collections of texts, such as minutes of policy meetings and speeches by central bankers.

A spokesman for the Fed declined to comment. Powell said on Feb. 6 that while policymakers were trying to write the statement in a language understood by Wall Street, he made his own remarks so that they were understood more broadly.

"Just say it in a more accessible way," Powell said at a meeting with educators.

Powell's five introductory statements had an average reading level of 12, which equals the last year of American high school. The last five Yellen introductory statements lasted an average of 14 or 2 years of college education.

Powell's opening statement in September, that the US economy was just strong and interest rates on the rise, was easy enough for a 10th year.

However, in January, Powell's opening statement became increasingly complex as he offered more nuanced views of the economic outlook and explained why the Fed had decided to suspend rate hikes.