Good example of how a central bank should speak after Brexit

Lars Christensen, the Market Monetarist, wrote the statement that the Fed should have written and released publicly, had the U.S. central bank been a true, hard-line inflation targeter.

I was laughing out loud when reading Lars' post on his blog. Not because it is overtly funny but because his text is a brilliant illustration of how a pure inflation targeter would, and should, communicate at a time like this. Unfortunately, hardly any central bank has resorted to this clear and open mode of communications.

The following is Lars' reworked version of what the Federal Reserve put out as a two-sentence, one-paragraph statement:

"The members of the Federal Open Market Committee note that the British people have voted to leave the European Union. The decision today has caused an increase in volatility in global financial markets and increased demand for safe assets including increased demand for the US dollar. This effectively is an unwarranted tightening of US monetary conditions.

While the Federal Reserve is not in the business of fine tuning neither the US economy nor the financial markets, the Federal Open Market Committee nonetheless would like to remind market participants that the Federal Reserve has a 2% inflation target. Expectations for Fed Fund rates should reflect this target and so should expectations for potential asset purchases.

Presently market inflation expectations on all relevant time horizons are below this target and the Federal Reserve therefore stand ready to take the appropriate action to ensure inflation expectations match the 2% inflation target. In this regard it should be noted that the Federal Reserve has the ability to increase the money base as much as necessary to hit this target.

This means that the Federal Reserve remains committed to offsetting any internal and external shocks to nominal demand in the US economy that might jeopardize the inflation target. The Federal Open Market Committee will not allow inflation expectations to drift significantly away from the 2% inflation target."

Sadly, it seems there are few pure, openly-communicating inflation targeters among major central banks these days. Read my earlier post on major central banks singing the same tune after Britain's vote to leave the EU to see how they opted to hide in their statements behind vague and ambiguous wording about readiness to "consider any additional policy responses" or "take appropriate measures as necessary".