Monetary policy makers in the U.S. face some tough choices over the next few weeks as they consider the implications of slower Chinese growth that has convulsed financial markets. Investors are wondering how the Federal Open Market Committee is weighing options.
Committee Vice Chairman and New York Fed President William C. Dudley shared his view Wednesday, saying a September interest-rate increase was "less compelling to me than it was a few weeks ago."
Still, Dudley didn't rule out a September rate hike and said it will depend on how the U.S. economy performs and where financial markets settle. It's a confusing time for policy makers and investors.
In such periods of high uncertainty, more frequent and detailed communication is what's needed, said Laura Rosner, U.S. economist at BNP Paribas in New York who previously worked at the New York Fed.
"The outlook is evolving, and so what are the risks to policy tightening right now?" she said.
Here are three suggestions from former Fed staff members on how the FOMC could improve communication:
More frequent press conferences
If the Fed doesn't raise interest rates in September, Chair Janet Yellen could offer to hold a press conference following every FOMC meeting for the next six months, instead of after every other meeting as is current Fed practice. At the moment, September and December's FOMC meetings have press conferences while October does not. Increasing their frequency would bring the Fed into line with the practice of the European Central Bank and Bank of Japan, as well as Norway's Norges Bank and Sweden's Riksbank. St. Louis Fed President James Bullard has publicly called for press conferences after every FOMC meeting and International Monetary Fund Managing Director Christine Lagarde has made the same recommendation.
Pros: The public would have a fresh view of how the FOMC sees the world between the quarterly meetings. An October press conference would also underscore Yellen's oft-repeated message that all meetings should be considered "live" for policy action. She said in March that when the Fed does start raising rates it would be appropriate to explain the move in detail, and the Fed could arrange a conference call with reporters to answer questions if the decision falls on an FOMC that isn't already scheduled with a regular press conference.
"There is an argument to be made for having press conferences at every meeting," said Michael Hanson, senior U.S. economist at Bank of America in New York, who worked at the Fed Board's Division of Monetary Affairs in Washington.
Cons: It would create expectations for a press conference after every meeting on a permanent basis. While this might be worth doing, it would create more work for Yellen and the Fed staff.
Policy scenarios for investors
Simulations are easy for Fed staffers to do thanks to computer modeling. They could run a series of charts showing a sharp slowdown in China's growth rate alongside their best estimates of what that would mean for U.S. growth, employment and inflation. FOMC members could then provide their views on the right interest-rate path for that or other scenarios, or the staff could model several alternate paths, showing different economic outcomes resulting from those policy settings.
"I do think the Federal Reserve could make use of alternative simulations in some kind of policy document, such as the semi-annual monetary policy reports," said David Stockton, the former chief forecaster for the FOMC, who is now a senior fellow at the Peterson Institute for International Economics in Washington. "It helps when there are key uncertainties. It helps frame the economic dimensions of those uncertainties."
Pros: It would give investors useful templates for how the U.S. central bank might respond to unexpected changes in their outlook.
Cons: Scenarios could easily become dogma where investors conclude this is exactly how the central bank will behave because that is what they showed in a simulation. That's a sticking point. Central bankers like flexibility.
Quarterly monetary policy reports
The FOMC statement is a menu of paragraphs and sentences that the committee sticks together like a Lego set. Stock phrases facilitate agreement; they may not facilitate clarity.
Take a look at this phrasing on inflation from the statement:
And compare it with this from the minutes:
After the minutes were published, investors concluded that the committee was putting more emphasis on the risk of inflation remaining too low than the statement suggested.
A quarterly monetary policy report would provide the committee with a venue to dive into the sources of their uncertainty and provide a more detailed analysis of their views on risks to employment, inflation and growth.
"It would be very helpful if the committee could work in this direction," said Andrew Levin, a Dartmouth University economist and former Yellen adviser. "The major goal would be to explain in detail the rationale for the committee's decision, to give alternative scenarios, and give much more information on the outlook."
The Riksbank publishes a monetary policy report six times a year. The Bank of Canada publishes a monetary policy report each quarter, and the Bank of England has been publishing its quarterly "Inflation Report'' since 1993.
The Fed publishes a report to Congress twice a year, but it has been criticized internally as uninformative. Former Fed Governor Frederic Mishkin called the report "really terrible'' at the Oct. 24-25, 2006 meeting of the FOMC, according to transcripts. ``It’s sex made boring,'' he said. "The markets pay very little attention.'' Fed officials in 2012 considered the merits of a quarterly monetary policy report. Bullard, as well as Dennis Lockhart of Atlanta, and Charles Plosser, then president of the Philadelphia Fed, expressed varying degrees of support.
Pros: Investors would have a richer appreciation of the analysis shaping policy decisions.
Cons: There aren't many, aside from the risk of inundating the public with too much information that clouds rather than clarifies policy making.
For more, read this QuickTake: The Fed's Countdown