Should central bankers argue in public?

In the 2000s, researchers conducted experiments with economics students at the London School of Economics, Princeton University and the University of California. These used a simple computer-run economic model, which was subjected to random shocks. Students had to respond by moving interest rates and were scored on how well they kept unemployment at 5% and inflation at 2% over the course of 20 financial quarters. In every case, committees outperformed individuals. Indeed, a large body of empirical work suggests that well-run committees help smooth extreme perspectives, drive out poor judgment and provide more insulation from both political and personal pressure.

Beyond the relatively straightforward question of whether interest rates should be set by an individual or a group, the divide in the monetary policy world is between an individualistic approach to committees—as found in Britain and the Nordic countries—and collegiate committees, as at the European Central Bank.

In the individualistic model, policymakers express their own views, argue for a desired policy position and then vote for the action they prefer, with the votes later published. Members can and do disagree in public. By contrast, in a collegial system, the approach is to debate the options and then come to a collective decision, which all members stand behind. At the ECB, the aim is to achieve consensus and individual voting records are not publicised.

The Fed is something of a hybrid. Members of the Federal Open Market Committee (FOMC) can go their own way, and individual voting records are published. At the same time, the institution places a high value on collegiality. Alan Blinder, an economist at Princeton and former FOMC member, has argued that under Alan Greenspan, the Fed's chairman from 1987 to 2006, the FOMC was an "autocratically collegial system" in which the chairman dictated the consensus and other members were expected to fall in line.

A split vote, Mr Greenspan once lectured colleagues, would risk "serious problems for this organisation". Under Ben Bernanke, Janet Yellen, and Mr Powell, the Fed has been less dominated by one individual. The FOMC is made up of the seven permanent Fed governors, together with the president of the New York Fed and four of the other 11 regional Fed presidents on a rotating basis. No governor has dissented on a policy decision since 2005, but presidents are more willing to go against the grain.

Put the pedal to the floor

Which system is best? The question is a bit like asking if an automatic or manual car is superior—it depends on what you are after. Individualistic committees often move faster. It is easier to corral five votes among the nine members of the BoE's Monetary Policy Committee to change policy than it is to generate a near-consensus at the ECB or the Fed. The BoE was one of the earliest rich-country central banks to begin tightening policy in 2021 and among the first to begin cutting this year. Such a system also defends against the danger of groupthink.

However, this nimbleness comes at a cost. Although the need for consensus may slow down decision-making, it also allows policymakers to speak with a clear voice to financial markets and avoids the cacophony of conflicting signals with which BoE-watchers are all too familiar. When it comes to monetary policy, the expected path of interest rates can be just as important a tool as the level of rates now. The ability to send markets a single message is extremely useful.

Most of the time, influence over interest-rate expectations is more valuable than nimbleness. But not always. Imagine a situation in which there are signs the labour market is weakening, inflation is stubbornly above target, and markets are in turmoil. At such an inflexion point, when a change in the monetary policy regime is required, it might be better to be more open about disagreement. For once, it is better to be British than American.