Through the FOMC’s Looking Glass: An Orgy of Transparency

Back in the day, when I was a member of the FOMC (1991-2004) I occasionally had an opportunity to push back against a push for greater transparency surrounding monetary policy. I was usually in the minority in thinking that transparency can be taken too far—that the reduction in flexibility for policymakers and the one-way bet opportunities for markets were too high a price to pay for any perceived benefits. I opined on that subject publicly a while back when the FOMC recently began publishing its collective forecasts (projections?) for macroeconomic variables.

We learned today that they have now gone a bridge farther by announcing in their latest minutes that they will add a projection of the federal funds rate (forecast? policy intention? policy goal?) to the menu and start publishing those things (whatever they are, exactly) by individual members, not just the consensus. This, in my humble opinion, only compounds their previous error.

The federal funds rate is considered by most as the single instrument of monetary policy, now that everyone seems to have forgotten about money growth as a more important instrument and measure. Even if there is a tight range around individual federal funds forecasts, they will put monetary policy on a pre-announced trajectory that may turn out to be flawed, but will be more difficult to adjust once announced. That problem is compounded with members making their own forecasts of policy public since it will cause them to stick to their forecasts too long after the need to adjust them becomes obvious to everyone else. Nobody wants to be labeled a flip-flopper, not even a member of the FOMC.

Some press speculation has already posited that the change is being made to boost economic activity by reassuring the public and markets that low rates will prevail for a long time. In my humble opinion, there has already been too much reassurance along those lines. After all, it’s was several months ago that Mr. Bernanke and Company announced that rates would likely be unusually low through mid-2013, still 18 months away. The FOMC should be looking for a way to slip out from under that promise, not dig the hole deeper.

The economy is looking better—much better. While a “tight” monetary policy probably won’t be in order for some time, to me that doesn’t necessarily imply near-zero federal funds rates. The “financial repression,” meaning the loss of a return on saving and savings, may not be a serious matter during a normal period of easy money during a normal recession. After a few years, however, it must be taken more seriously.

Mr. Bernanke is talented enough to figure out a way to allow rates to rise a tad while preventing a surge in money growth. He needs to do that, and to do that he needs more freedom of action, not less.

 

 

 

Comments (2)

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  1. Wayne Jett says:

    Bob,

    Back when you were at the Fed and since, I have looked to your views for common sense applied to monetary and economic policy. However, since becoming a practitioner of classical economic theory and a direct participant in financial sector, I find myself holding views different from yours regarding the role of the Fed and its policies.

    For example, I am convinced stabilizing the dollar’s value by use of the overnight funds rate is impossible and is not even an objective of the Fed in manipulating the funds rate. Also, I have come to believe that the Fed serves private, pecuniary interests rather than the public’s interests.

    Please take a look at my recently released book, The Fruits of Graft – Great Depressions Then and Now. You will be interested in the specific actions I identify as the causes of the Great Depression (hint: the Fed was not the primary perpetrator, as the current Fed chairman contends).

  2. Charlene says:

    The fact is that health is very much out of the hands of iulviidnads. Most are born healthy, some are born very unhealthy. Universal health care should be desired among any nation calling themselves civilized. The burden should be spread across all citizens. Why would a for profit insurance company take on the risk of those born unhealthy? The goal in a free market system is to maximize profit, is it not?