Andrew Levin, a Fed staffer who worked extensively on Janet Yellen’s communication reforms when she was vice-chair, sets out a set of principles for central bank communications in a paper at today’s Hoover central banking conference.
He calls for press conferences after every Fed meeting and a quarterly, Bank of England-style monetary policy report. Mr Levin is currently at the IMF but this a direction many Fed officials want to go.
Here are Mr Levin’s principles, with my highlights in bold, and comments in italic: Read more
The Fed is locked into bad equilibrium where it is forced to change policy gradually, because that is what markets expect, which in turn means policy works better with gradual changes.
That is the possibility outgoing Fed governor Jeremy Stein has raised in a speech on Tuesday evening. Read more
The most obvious problem with the Fed’s interest rate forecasts, discussed here yesterday, is their dissonance with the FOMC statement’s forecast of exceptionally low interest rates “at least through late 2014″.
The median participant (9th of 17) thinks rates should be 1 per cent at the end of 2014 and the median voter (5th or 6th of 10) must think they should be a minimum of 0.5 per cent. The statement is a committee decision and it can reasonably be different from the median individual view. It is still confusing, though, and weakens the credibility of the statement when they look so different.
The Fed is looking at a wide range of options to tweak communications further. Some would resolve the issues with this chart – for example Mr Bernanke acknowledged the idea of identifying who made each individual forecast – while others address the broader and more important question of giving information on the Fed’s reaction function.
Here, though, are a few ways to address the simple confusion caused by the voter/non-voter divide in the rate forecast chart. Read more
The FOMC meets for a two-day meeting on the 24th & 25th of April, with a decision expected as usual at 12.30pm, followed by a press conference at 2.15pm.
What to expect
Not a lot. If there are any substantive moves, I would expect them to be changes in the communications framework, rather than to existing parameters of monetary policy. Read more
Today’s announcement that the FOMC will publish interest rate forecasts from its January meeting is a small surprise. It seemed unlikely there would be time to settle anything at the December meeting; on the other hand, the minutes before a two-day meeting were always a likely time to announce such a move, because it give markets time to prepare for what they’re getting in a few weeks time.
The December minutes are full of clues on the trade-offs that the Fed made in its decision.
(1) The FOMC decided on publishing the existing forecasts of “appropriate” monetary policy made by each committee member. This is not as simple as it seems and was clearly the subject of some debate. Read more
For me, the most interesting passage in the November Fed minutes was:
“The Chairman asked the subcommittee on communications to give consideration to a possible statement of the Committee’s longer-run goals and policy strategy, and he also encouraged the subcommittee to explore potential approaches for incorporating information about participants’ assessments of appropriate monetary policy into the Summary of Economic Projections.”
A host of communication options were discussed in the minutes but these are the only two that the Chairman referred back to the subcommittee on communications (vice chair Janet Yellen, governor Sarah Bloom Raskin, Charles Evans of Chicago and Charles Plosser of Philadelphia). That’s a strong signal of the direction that debate is going. Read more
Charles Plosser of the Philadelphia Fed gave a noteworthy speech today on how the US central bank might improve its communication policies.
Mr Plosser has always been interesting on this subject — he is a long time advocate for a defined Fed inflation objective — but he is especially worth paying attention to now as a member of the Fed subcommittee that is looking at communications.
Mr Plosser is the obvious ‘hawk’ on that committee — the other members are vice chair Janet Yellen, governor Sarah Bloom Raskin, and Chicago Fed president Charles Evans — and its clear that there is a lot of common ground on inflation objectives and on providing more information about the forward path of policy. Read more
Today’s speech by Fed chairman Ben Bernanke was a hard one to decode. A lot of the material was bland and repetitive stuff about central banks’ responsibility for financial stability; how the recession doesn’t really change the consensus on monetary policy; and how prudential rather than monetary policy is the right way to tackle asset price bubbles.
That made his comments about how one consequence of the recession will be a greater role for communication in central bank doctrine stand out all the more. Read more
Long gone is the era when markets were left guessing about what the federal funds target actually was. Now we have a Federal Reserve which has not only told us about their current policy rate, but what they expect the rate to be two years from now.
At the forefront of these efforts for altogether more transparent monetary policy have been the select group of central banks that publish a projected path for interest rates.
Advocates say the projections give central banks greater influence over markets’ expectations, which in turn enhances the transmission of monetary policy. The case for projections, then, is similar to that for conditional commitments such as the Fed’s.
But do they actually work?
A report commissioned by Sweden’s parliament into the performance of the Riksbank – among this select group (which also includes the Czech National Bank, Norges Bank and the Reserve Bank of New Zealand) – suggests not. At least not past a year ahead. Read more