DP20680 FCI-Plot: Central Bank Communication Through Financial Conditions

• Ricardo Caballero Alp Simsek
26 Sep 2025

We develop a model of central bank communication where market participants' uncertainty about desired financial conditions creates misunderstandings ("tantrums") and amplifies the impact of financial noise on asset prices and economic activity. We show that directly communicating the expected financial conditions path (FCI-plot) eliminates tantrums and recruits arbitrageurs to insulate conditions from noise, while communicating expected interest rates alone fails to achieve these benefits. We demonstrate that scenario-based FCI-plot communication enhances recruitment when participants disagree with the central bank regarding scenario probabilities. This enables an "agree-to-disagree" equilibrium where markets help implement central bank objectives despite differing views.