Yellen Must Show How 12 Fed Opinions Become One Policy
Federal Reserve Vice Chairman Janet Yellen may face her biggest challenge yet as head of a panel on communications: showing how 12 Fed officials with clashing views unify behind a single policy.
Yellen since June 2011 has led a committee created by Chairman Ben S. Bernanke to shed light on Federal Open Market Committee decision making and minimize public confusion over its goals. In January the central bank took one of its biggest steps ever toward greater openness by publishing a mission statement, an inflation target and anonymous forecasts by each FOMC participant for the main interest rate.
The new transparency has exposed wide differences, with one official in June forecasting the main interest rate will rise to 3 percent at the end of 2014 while six others predicted the rate will stay between zero and 0.25 percent. Yellen’s current task, as shown in minutes from the FOMC’s June meeting, is to clarify how policy makers melded their divergent views into a consensus to hold the main interest rate at zero through at least late 2014. The FOMC affirmed their rate plan in an Aug. 1 statement.
“What you want is a system that conveys information where the center of the committee is and where it is likely to go,” former Fed Vice Chairman Donald Kohn said. “It reduces uncertainty” and can help curb market volatility, said Kohn, a senior fellow at the Brookings Institution in Washington.
The FOMC’s 19 participants are considering changes to the Fed’s quarterly publication known as the Summary of Economic Projections, which includes their individual forecasts for gross domestic product, inflation, unemployment and interest rates, according to their June meeting minutes. One possibility would be to provide a single forecast by the FOMC’s 12 voting members for the economy and interest rates. Yellen, 66, hasn’t publicly committed to a time frame for any changes to communications.
The FOMC recognizes that it has yet to show how its “diverse views come together in the committee’s collective judgment about the outlook and appropriate policy as expressed in its post-meeting statement,” according to minutes of the June 19-20 meeting.
While the FOMC statement doesn’t forecast a path for the size of the Fed’s $2.86 trillion balance sheet, committee participants often comment about its optimal size, occasionally moving markets.
Boston Fed President Eric Rosengren told the New York Times on Aug. 6 that the central bank should buy mortgage-backed securities and Treasuries in an open-ended quantitative easing program, according to the newspaper. His statements helped lift the Standard and Poor’s 500 index 0.5 percent on Aug 7.
The following day Dallas Fed President Richard Fisher said in an interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen that “we have done enough,” while warning of overburdening central banks. The Standard & Poor’s 500 Index fell 0.4 percent during the first five minutes of trading.
Neither Fisher nor Rosengren is an FOMC voter this year. Fisher’s view isn’t in line with the FOMC’s plan to “provide additional accommodation as needed,” according to its statement this month. At the same time, the committee hasn’t embraced the open-ended, unlimited bond buying advocated by Rosengren.
Starting with his 2005 nomination hearing, Bernanke has made greater transparency a main goal of his chairmanship. He began holding regular press briefings in April 2011, adopting a practice by central bankers in Europe, Japan and the U.K. For decades Fed chairmen had limited their appearances largely to speeches and congressional testimony.
Bernanke, 58, sat for interviews with CBS Corp.’s “60 Minutes” program in 2009 and 2010, and led a town-hall-style discussion on PBS television. He has also engaged with business leaders and college students around the country for lectures, question-and-answer sessions and discussions about the economy.
The Fed chairman said at the 2005 hearing that a more transparent central bank promotes “democratic accountability,” improves market efficiency and helps anchor expectations for inflation.
Congress is pressing the central bank for details on how it sets monetary policy. The Fed currently waits five years before releasing FOMC transcripts. The central bank’s seven governors and William C. Dudley, president of the Federal Reserve Bank of New York, hold permanent FOMC votes. The 11 other regional bank presidents rotate as voters.
The House of Representatives approved legislation last month that would subject the FOMC to an audit of its deliberations over changes to the benchmark interest rate. The bill won support from 238 Republicans and 89 Democrats. A Senate version of the legislation hasn’t been taken up by the Banking Committee.
Philadelphia Fed President Charles Plosser, a member of Yellen’s communications subcommittee, said in speeches this year that the FOMC needs to show the public the “systematic relationship” between changes in economic conditions and “the policy actions and choices made by the central bank.”
Yellen said in a June speech that Fed communications “helped the public understand better the committee’s likely policy response” as it holds the benchmark lending rate at zero during a slow economic recovery.
Presenting in a unified way how 12 FOMC voters view the economic outlook and future monetary policy would be challenging, said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington.
“It is tricky,” Gagnon said. “They can often agree on the policy, but have differing views on the economic forecast and differing views on what effect policy has on the economy.”
A single policy forecast could reflect the majority view of the 12 FOMC voters, or it could incorporate the outlook of dissenters such as Richmond Fed President Jeffrey Lacker who say monetary policy isn’t a cure-all for the economy, said Gagnon, a former associate director at the Fed Board’s Division of International Finance.
FOMC participants are looking to other central banks for ideas, according to the minutes.
The Fed could borrow from its counterpart in Norway, the Norges Bank. It publishes a report three times a year that forecasts how the policy rate would change depending on how much weight it would give to the risk of inflation, an economic slowdown and financial imbalances.
Similarly, the Fed could show possible paths for policy based on how officials want to balance their two mandates to achieve maximum employment and ensure price stability.
“You have fundamental differences in views at the Fed on how much you weight each of the two objectives,” said Roberto Perli, a managing director at International Strategy & Investment Group in Washington and a former staff member of the Fed Board’s Division of Monetary Affairs.
A summary of the FOMC’s consensus view would probably also have to specify how the Fed would alter the size of its balance sheet in response to changes in the economy, said Julia Coronado, chief economist for North America at BNP Paribas in New York. The Fed, having held its main interest rate near zero since December 2008, pushes down borrowing costs primarily through bond purchases.
“They haven’t talked to us about balance sheet at all and how it would evolve if the risks materialized,” Coronado said. “It has been a conspicuous hole in their communication.”
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