Central bank communication in a polarised world

In an era of increasing political polarisation, public trust in institutions like the US Federal Reserve has become a contentious issue. This column shows that individuals who believe the Fed shares their political commitments report higher trust, lower inflation expectations, and greater independence. Conversely, those who see the Fed as biased exhibit scepticism and higher inflation expectations. Using large-scale survey experiments, the authors find that strategic communication emphasising institutional background and policy goals can mitigate perception biases, enhance credibility, and improve the public’s responsiveness to Fed signals, ensuring more effective policy transmission.

The independence of central banks has long been considered essential for maintaining macroeconomic stability (Kydland and Prescott 1977, Barro and Gordon 1983, Bernanke 2010). Yet, in an era of increasing political polarisation, public trust in institutions like the US Federal Reserve has become a contentious issue. In recent research (Kuang et al. 2024, 2025), we explore how political alignment influences perceptions of the Fed’s independence and credibility, and how these perceptions shape macroeconomic expectations. Additionally, we examine whether strategic central bank communication can mitigate perception biases and improve the effectiveness of monetary policy.

Our findings, based on large-scale survey experiments conducted in April 2024 and January 2025, reveal that political alignment strongly affects trust in the Fed. Individuals who perceive the Fed as aligned with their political stance report higher trust, higher independence, and lower inflation expectations, whereas those who view it as favouring the opposing party exhibit greater scepticism and expect worse economic outcomes. However, strategic communication stressing the goals, performance, and nomination process of board members can enhance trust, reduce misperceptions, and improve the effectiveness of monetary policy, suggesting that central banks must adapt their messaging to a politically divided audience.

Public perceptions of the Fed’s political leaning, independence, and trustworthiness

Despite its legally mandated independence, the Fed is viewed through a partisan lens. As shown in Figure 1, our April 2024 survey experiment of over 5,200 US consumers (Kuang et al. 2024), conducted during the Biden administration, reveals significant heterogeneity in perceptions of the Federal Reserve:

• 66% of Democratic-leaning participants believed the Fed favoured Republicans.
• 60% of Republican-leaning participants thought the Fed favoured Democrats.
• Overall, 63% of respondents perceived the Fed as an out-group institution, meaning they saw it as politically opposed to their own views.

These perceptions have significant consequences for economic expectations. Those who viewed the Fed as aligned with their political preferences were more optimistic about economic conditions, expected lower inflation, and had greater trust in the institution. Conversely, individuals who perceived the Fed as biased against their political group expected higher inflation and exhibited lower confidence in its ability to manage the economy.

Figure 1 Perceptions of the Fed’s political leaning by respondents’ political leaning

Public trust in the Fed is crucial for effective monetary policy transmission (Lagarde 2023, Phelan et al. 2022, Jansen et al. 2022). In Figure 2, our April 2024 survey shows that the levels of trust in the Fed’s ability to manage inflation and unemployment vary significantly based on perceived political alignment:

• On a scale of 1 to 7 (where 1 represents no trust and 7 complete trust), individuals who viewed the Fed as an in-group institution reported an average trust score of 4.2.
• Those who perceived the Fed as an out-group institution had a significantly lower trust score of 3.1.
• Trust in the Fed correlates strongly with inflation expectations: consumers with the highest trust levels expected inflation to be 2.1 percentage points lower than those with the lowest trust levels.

These results underscore challenges the Fed faces in maintaining credibility in a politically polarised environment. If large segments of the population distrust the central bank, they may be less responsive to its policy signals, weakening the effectiveness of monetary policy.

Figure 2 Trust in the Federal Reserve by intergroup perceptions

Another critical dimension of public perception is the Fed’s perceived independence. In Figure 3, our January 2025 survey shows that those who view the Fed as an in-group institution rate its independence significantly higher than those who see it as an out-group (Kuang et al. 2025). Specifically, individuals who trust the Fed’s autonomy tend to expect lower inflation and demonstrate greater confidence in its ability to maintain price stability. Conversely, those who perceive the Fed as politically influenced exhibit higher inflation expectations and greater uncertainty about economic conditions. These findings suggest that the effectiveness of monetary policy hinges not only on the Fed’s actual independence, but also on the public’s belief in its autonomy, reinforcing the need for transparent communication strategies.

Figure 3 Perceived independence of the Federal Reserve

Notes: This figure plots the perceived independence of the Fed across the following dimensions based on respondents’ alignment with the Fed (in-group, out-group, or neutral), measured on a 1 to 5 scale, where 1 indicates Strongly Disagree and 5 indicates Strongly Agree. Respondents rated the following statements: (1) ‘The Federal Reserve’s legal foundation strongly protects it from political interference’ (Quasi-Constitutional Independence); (2) ‘The Federal Reserve sets key policies, such as interest rates, without needing approval from government officials’ (Institutional Independence); (3) ‘Appointments to the Federal Reserve’s leadership positions are made based on expertise and qualifications rather than political loyalty’ (Personal Independence); (4) ‘The Federal Reserve controls its own budget and resources, limiting the government’s ability to influence its actions’ (Financial and Economic Independence); and (5) ‘The Federal Reserve will not tolerate higher inflation rates in order to help reduce the real value of the US government’s debt’ (No Tolerance). Statements (1) – (4) capture the four pillars of central bank independence that Haldane (2020) emphasises.

Behaviours of acquiring and processing Fed communication by intergroup preferences

Our study also sheds light on how political alignment influences individuals’ willingness to acquire and process information from the Fed (Kuang et al. 2024). During an experiment embedded in our survey, participants were given a choice between news from the Fed or partisan media outlets, and we measured their willingness to pay for different sources. Individuals who viewed the Fed as an in-group institution were more likely to spend money to increase their probability of receiving information directly from the Fed, while those who saw it as an out-group institution preferred partisan sources. This result demonstrates that perceived political bias significantly affects how the public seeks economic information, which in turn influences their macroeconomic expectations.

Furthermore, in the information processing stage, participants who perceived the Fed as an in-group institution were more likely to update their inflation expectations based on Fed communications provided in our survey. These findings suggest that beyond simply disseminating information, the effectiveness of Fed communication depends on overcoming partisan biases that affect how people engage with and interpret economic data.

Can central bank communication mitigate polarisation?

Given these challenges, how can central banks maintain public trust and credibility? Our research tested the effectiveness of different communication strategies through a randomised controlled trial (Kuang et al. 2025).

Participants were randomly assigned to a control group, which did not receive any additional information, or to one of three information treatments:

1. Information about the institutional background of the Fed, including its appointment structure and information about political affiliations of Federal Open Market Committee (FOMC) members.
2. Policy objectives, emphasising the Fed’s dual mandate of price stability and maximum employment.
3. Performance-based communication, highlighting the Fed’s post-Covid actions and its performance in managing inflation and stabilising the economy.

These information treatments provide clear, factual details about the Fed’s institutional structure, policy objectives, recent actions and performance. Next, all participants, including those in the control group, read a news article based on the Fed’s latest FOMC statement on the interest rate decision and the US economy. 

We found that all three communication strategies significantly increase the weights survey participants assigned to news from the Fed when updating their expectations. Additionally, conveying information about the Fed’s institutional structure and policy objectives enhances trust and raises the likelihood that respondents perceive the Fed as more independent.

Conclusion

Political polarisation poses a significant challenge for central banks seeking to maintain public trust and ensure effective monetary policy transmission. Our research demonstrates that public perceptions of the Fed’s political bias and independence shape economic expectations, trust, and responsiveness to monetary policy. However, strategic communication can mitigate these biases and enhance the credibility of central banks. In particular, improving public understanding of the Fed’s institutional framework and long-term objectives can help it navigate an increasingly polarised environment, counter misinformation, and reduce perception biases.

Source: cepr.org