Last week’s decision by the Federal Reserve to provide a quantitative definition of price stability and the publication of the 17 Federal Open Market Committee members’ expectations of the Fed funds rate over the next few years aims at improving transparency and accountability of the central bank. It also raises several questions.
To be effective, central bank communication needs to be well understood not only by sophisticated market participants but also by the public. As they are currently designed, the new tools might turn out to be too complex, and risk creating confusion, for both groups. This could be exploited by those, in particular in Congress, who are looking for new excuses to undermine the independence of the Fed. This risk should not be underestimated. Continue reading »