Preventing Crises Through Communication

Communication in a crisis can take many forms. Crisis communication is generally understood as the use of targeted communications measures to manage the PR damage caused by a crisis – or, ideally, to prevent that damage altogether. But there is another form of crisis communication: a proactive one. Its purpose is to address crises that have not yet materialised, but are unlikely to be avoided, by taking preventive action. An example from monetary policy – “forward guidance” – shows what this can look like in practice.

Perhaps the best-known use of forward guidance came in response to the aftermath of the global financial crisis of 2007 to 2009. Originating in the US housing market, the crisis first sent the financial sector into turmoil before destabilising the global economy as a whole. The US economy was at risk of slipping into deflation. Had that happened, the situation could have spiralled beyond the control of central banks.

Conventional approaches failed

The US central bank, the Federal Reserve (“Fed”), attempted to counter this development by cutting interest rates in order to stimulate the market. To no avail: the federal funds rate rapidly fell to almost zero, yet inflation remained well below the desired target. The reason was the market’s deeply sceptical outlook. After defaults, insolvencies and volatile interest rates, market participants had been badly burnt. Cheap money alone was not enough to stimulate investment. Investors feared that future interest rate increases by central banks would stifle the recovery and erode the returns on their investments.

The Fed appeared to have its hands tied. Further rate cuts could have jeopardised the banking system. Yet the central bank still needed to stimulate the financial markets in order to stabilise the economy and avert the threat of deflation.

Communication as an alternative

The Fed made a significant contribution to escaping this liquidity trap through proactive crisis communication. To do so, it employed an instrument known as “forward guidance”: the advance communication by a central bank of its intended future monetary policy. The Fed’s aim was to reassure the market through transparent and credible communication, without making further adjustments to interest rates.

In December 2008 in particular, the Fed publicly confirmed that it expected interest rates to remain exceptionally low for some time. Over the following years, the central bank repeatedly committed to maintaining its accommodative monetary policy. At times, it even specified concrete time frames and conditions for these commitments.

Here we can see one of the most important principles of successful crisis communication at work: transparency. On the one hand, the Fed provided insight into its decision-making processes. On the other, it communicated openly with the markets about its intended course of action. This transparency was – and remains – a crucial prerequisite for gaining the understanding and trust of stakeholders.

Crisis averted?

The strategy paid off. Forward guidance was, of course, only part of the solution – the Fed’s massive bond-buying programmes also played their part. But knowing how interest rates were likely to develop over the coming months gave market participants the certainty they needed to plan ahead. Scepticism among investors, banks and businesses began to recede. The market was prepared to invest again.

Low interest rates could finally have the desired inflationary effect. For the time being, the threat of deflation had been averted. Proactive crisis communication had helped prevent the worst-case scenario. Nevertheless, given the weakness of the economy, the Fed was still operating on the edge of crisis. It needed to ensure that inflation did not fall sharply again.

This is where another fundamental principle of successful crisis communication became essential: predictability. The Fed stood by its forward guidance. Its word could be trusted. Inflation recovered quickly and, at times, remained above the two per cent target for several consecutive months. Yet interest rates stayed close to zero, just as the Fed had previously announced. The market stayed the course, prompting even initially sceptical investors to resume investing.

What can we learn from “forward guidance”?

Of course, the principle behind forward guidance is nothing new when it comes to crisis communication for companies and organisations. Here, too, transparency and predictability are essential principles for maintaining – or rebuilding – stakeholders’ trust during difficult times.

Companies may not have the institutional weight of a central bank, for example, but the underlying principle is the same: if I communicate at an early stage what measures I intend to take and why, and then follow through on what I have promised, my suppliers, customers and financial stakeholders know where they stand with me – and that they can rely on me.

But this only works if I act early. The longer a company waits before tackling a crisis decisively, the greater the loss of trust – and the longer it will take to win that trust back.