Pushing the (Decision) Boundaries: Dynamically Calibrating Differentially Private Noise to Explainability in Federated Learning

Federated Learning (FL) with Differential Privacy (DP) is increasingly adopted to preserve data confidentiality in distributed machine learning. However, DP noise distorts learned representations and degrades explanation fidelity, limiting differentially private FL where trustworthy explanations are required, such as assistive clinical diagnosis. Prior work adapted DP noise with static feature-importance signals, restricting explainability to post hoc analysis and precluding noise calibration to explanation quality during training. We propose XCal-FL, a closed-loop, explainability-driven local training algorithm for image classification in cross-silo FL that dynamically calibrates DP noise from three complementary signals: (1) prediction logit variations, measuring causal influence on model confidence, (2) counterfactual margins, capturing decision-boundary sensitivity, and (3) saliency concentration, quantifying spatial coherence of model attention, while enforcing formal DP guarantees via adaptive privacy accounting. Experiments on three medical imaging datasets across varying FL configurations show that XCal-FL yields more accurate and interpretable global models, improving predictive performance by over 10% and explanation fidelity by up to 5× over static-noise FL, and outperforming state-of-the-art adaptive DP methods in fidelity. XCal-FL also achieves higher privacy-budget efficiency, turning each unit of cumulative privacy loss into larger gains in both accuracy and explanation fidelity. Our analysis further reveals that, unlike predictive performance, which scales roughly linearly with privacy loss, explanation fidelity exhibits non-linear dynamics. These findings suggest explainability is a distinct dimension of the privacy trade-off that cannot be inferred from utility alone, with implications for training and privacy-budget allocation in decision-critical applications.