Monetary Policy

Talk Less, Smile More

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“Ciao, Mario, come va?” is not what she’s saying. Source: Reuters

Aaron Burr’s advice to the young Alexander Hamilton in Lin-Manuel Miranda’s smash Broadway musical is, “Talk less, smile more.” That might have been the leitmotif for European Central Bank President Mario Draghi, Federal Reserve Chair Janet Yellen and other top central bankers when they met in Frankfurt Tuesday to talk about how much they should talk.

They discussed the uses and risks of “forward guidance” – a tool they have deployed since the 2008 financial crisis after interest rates sank to zero, depriving them of their traditional mechanism for steering monetary policy. Forward guidance is letting market participants know how the central bank views economic developments and what it expects to do about them.

For Mr. Draghi, the task is particularly complicated, because he must give the guidance in a language that neither he nor most of his constituents learned from their mothers – English. “We speak English,” said Mr. Draghi, an Italian. Official pronouncements for the euro zone are translated into nearly a score of languages, but in interviews and speeches, Mr. Draghi and other officials usually speak English.

Brexit doesn’t change anything, because Britain was never part of the euro or the ECB, so its exit is irrelevant. Rather, English is the lingua franca of the financial world and for ECB officials amongst themselves. (The same holds true for the European Union itself, which will continue to use English as a working language after Brexit.)

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