In Summary
Central bank credibility is becoming a risk rather than a background condition. At Jackson Hole, the new Fed Chairman called for a quieter central bank, breaking with two decades of managing expectations while the US Treasury is co-steering financial conditions through debt maturity and buybacks. Meanwhile in Europe, cancelling debt held by the Eurosystem has entered the French presidential campaign and investors still remember the Bank of England's emergency bond purchases during the Mini-Budget crisis. Against geopolitical tension, partisan polarization, inflation overshooting and elevated sovereign debt, these are all risks for central bank credibility – long a shock absorber for markets, it may start amplifying shocks instead.
We introduce a framework measuring credibility on six dimensions: the ECB tops the ranking, the BoJ carries the highest overall risk, and the Fed and BoE each show different vulnerabilities. We use six dimensions, three are structural: institutional credibility (legal independence, leadership stability), expectation credibility (how memory of past inflation shapes expectations) and the credibility gap (control over long-term yield trend); and three are cyclical: credibility risk sentiment (media coverage questioning independence), market credibility (how well prices and surveys track the inflation target) and credibility pressure (difficulty defending the price of money). The ECB ranks highest, an asset for the euro's international role. The Fed is strong structurally but weaker cyclically; the BoE's weakness is structural. The BoJ carries the highest risk, hit by JPY depreciation and long-end steepening at once.
Two trends capture the erosion: news-based concern is at its worst since 2017, and central banks are judged on a shorter track record than before 2022. The Fed drives 70% of global news coverage on central-bank credibility, yet Americans are less worried than the rest of the world. The opposite holds for the ECB, BoJ and BoE, where concern is mainly domestic. In parallel, we estimate how many years of past inflation shape expectations – how long the public's memory of past mistakes lasts. That memory fell from eight years to four in the 1980s disinflation fight, rebuilt to an 8-12-year peak by 2021, then was cut toward early-2000s levels by 2022. Credibility holds on market and survey measures, but long-earned trust has been in part lost.
Central banks have not regained their grip on the long-term yield trend after ending QE, opening a credibility gap. For the Fed and BoJ, yields sit above what policy implies – closing that gap may require buying long-term bonds again. For the ECB and BoE this is less urgent. Each gap opened at a distinct balance-sheet turn: end of QE for the Fed, end of yield-curve control for the BoJ, start of QE for the ECB and BoE. Markets seem to underprice renewed bond-buying odds in the US and Japan.
Restoring credibility means acting on four fronts, the cheapest being the most urgent: publish a rule-based framework with voting records so giving up forward guidance reads as discipline, not silence; anchor communication in reference points like wage growth or nominal GDP; define the Treasury relationship before issuance becomes a rival lever on rates and, most urgently, decide now how to respond if rates hit zero again, rather than improvise under the next shock. Credibility once let central banks avoid intervening at all; reversed, it will amplify shocks instead of absorbing them –and the Fed and BoJ have the least room to disappoint.