Fed Weighs Revamped Monetary Report as Guide to Policy
Federal Reserve officials are discussing whether to start a quarterly monetary policy report to provide a clearer guide to their economic outlook and the likely course for policy.
“We are talking a lot about it,” Philadelphia Federal Reserve Bank President Charles Plosser said in an interview on July 5. “The question is, can we put it together in a way that is coherent and makes sense and improves our communications?”
Plosser serves on a committee created by Fed Chairman Ben S. Bernanke to consider how to better explain its decisions and policies to the public. Bernanke, who is scheduled to deliver his semi-annual testimony to U.S. lawmakers next week, has established an explicit inflation target and has started giving press conferences in a push to improve transparency.
“They have come a long way, and they need to complete the process,” said Frederic Mishkin, a Columbia Business School professor who served on the Fed board from September 2006 until August 2008. “You want to achieve accountability, but also have markets understand why you are doing what you are doing.”
In another Bernanke innovation, Fed officials publish their forecasts for inflation, growth and unemployment four times a year, as well as their outlook for their key interest rate, albeit anonymously. For all their efforts, investors still have to guess how Fed policies will evolve as new data show the economy moving closer or further from their goals, Mishkin said.
“We provide a great deal of information, but it is essentially disaggregated in the sense that it’s forecasts of individuals,” Atlanta Fed President Dennis Lockhart said in response to a question last month.
It would be useful if there was “a greater sense about how the committee would react as opposed to individuals,” Lockhart said. “I think that would be progress if we could do that.”
Starting a quarterly report is a “distinct possibility,” St. Louis Fed President James Bullard said in response to a reporter’s question on June 29 after a speech in Little Rock, Arkansas. “There is interest in the Fed in producing something like this.”
U.S. stocks fell today, giving benchmark indexes the longest slump in more than a month, after a jump in Spanish bond yields above 7 percent intensified concern about Europe’s crisis. The Standard & Poor’s 500 Index declined 0.2 percent to 1,352.45 at 4 p.m. in New York. The yield on the 10-year Treasury note fell to 1.51 percent from 1.55 percent late last week.
Other reports showed German exports rebounded more than forecast in May, helping Europe’s largest economy to weather the crisis, and China’s inflation eased to a 29-month low.
The Fed’s main tool for communicating changes in policy is the statement, usually less than two pages long, issued by the Federal Open Market Committee immediately after its eight regular meetings each year.
Last month, the Fed eased policy by extending its Operation Twist program to lengthen the maturities of assets on its balance sheet. The program is intended to boost growth by pushing down long-term borrowing costs.
The statement tied “further action” to “sustained improvement in labor market conditions in a context of price stability.”
Such qualitative language communicates the committee’s priorities without specifying the triggers for action, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.
Illusion of Rigor
“What they are trying to do is create the illusion of quantitative rigor, but the reality is there is a lot of judgment that goes into it,” Stanley said.
Since the June 20 statement, government data showed that inflation slowed and job growth lagged behind economists’ forecasts -- suggesting that the economy may be moving further away from the Fed’s goals.
Prices rose 1.5 percent from a year earlier in May, as measured by the personal consumption expenditures price index, and employers added 80,000 workers to payrolls in June.
“It is very hard to give as rich a sense of that systemic approach to policy in brief statements we issue at the end of each meeting,” Plosser said. A detailed monetary policy report would be a “logical next step” for the FOMC to convey its strategy, he said.
One Fed publication that’s a candidate for an overhaul is the monetary policy report Bernanke presents to Congress twice a year, said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington.
Little on Outlook
That report is mostly retrospective and says little new about the outlook for monetary policy. Congress is due to get the report next week.
“It was not meant to create much news,” said Gagnon, who was an associate director at the Fed’s Division of International Finance from 1999 to 2008. “What I would personally love to see is some discussion of how their policies are going to achieve their objectives.”
Mishkin called the report “really terrible” at the Oct. 24-25, 2006 meeting of the FOMC, according to transcripts. “It’s dull, it’s sex made boring,” he said. “The markets pay very little attention.”
The central banks of Canada, England and Norway are among those that issue regular reports aimed at updating the public on the outlook and risks to the economy. One of the most detailed is produced by Norway’s Norges Bank, which includes forecasts of the policy rate under different economic scenarios.
Many of these banks have a single goal of hitting an inflation target over time, unlike the Fed, which has a dual mandate to keep inflation low and stable and maximize employment. They also have policy-making committees that are smaller than the Fed’s 12-member FOMC, making it easier to achieve consensus on the route to that goal.
Fed policy makers in January declared a long-run inflation goal of 2 percent for the first time, a step in forging a consensus on steering policy toward a target.
The Federal Reserve Act is ambiguous on how soon the central bank needs to achieve its goals or how it should balance them. That’s left an opening for an array of opinions from Fed officials.
Describing how the committee plans to get to full employment and stable prices could be “very tricky from a governance standpoint” Mishkin said in an interview. That doesn’t mean the Fed shouldn’t try, he said, adding: “Committees have to make decisions.”
One example of how policy makers may emphasize one goal over another was Richmond Fed President Jeffrey Lacker’s dissent against the committee’s June decision to provide more stimulus. His statement following the meeting shows he puts more weight on inflation risks.
“Impediments to stronger growth appear to be beyond the capacity of monetary policy to offset,” Lacker said.
Chicago Fed President Charles Evans, by contrast, has stressed jobs. He has suggested that the committee refrain from raising rates until unemployment falls below 7 percent or inflation rises above 3 percent “over the medium term.”
Economists, including Bernanke, have long argued that central bank transparency improves public trust, and helps rid the economy of costly volatility arising from discretionary, unpredictable policies.
An agreement on how the FOMC would respond to the risks could go a long way toward making the Fed more transparent and its policies more effective, said Mark Gertler, a New York University economist and research co-author with Bernanke.
“We should not lose sight of the fact that the primary challenge for policy makers is to get the recovery going,” said Gertler. “A well-done inflation report could even be a bit helpful for this.”
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