By Steven K. Beckner
(MNI) – The Federal Reserve’s decision to give quarterly forecasts
of the federal funds rate has won acclaim as a major step forward in
monetary “transparency,” but plenty of doubts and concerns are being
raised as well.
And it remains unclear exactly how the Fed’s rate-setting Federal
Open Market Committee will incorporate funds rate forecasts in its
Summary of Economic Projections (SEP), beginning at the end of its Jan.
24-25 meeting.
Critics acknowledge that the FOMC decision, revealed in minutes of
the Committee’s Dec. 13 meeting released Tuesday, is a milestone in
central bank communication, but they say it falls short of what is
needed. Some fear it could backfire.
And how will markets use (or abuse) the new information?
The FOMC minutes disclosed that “at the conclusion of their
discussion, participants decided to incorporate information about their
projections of appropriate monetary policy into the SEP beginning in
January.”
“Specifically, the SEP will include information about participants’
projections of the appropriate level of the target federal funds rate in
the fourth quarter of the current year and the next few calendar years,
and over the longer run.”
The December FOMC minutes go on to reveal that “the SEP also will
report participants’ current projections of the likely timing of the
first increase in the target rate given their projections of future
economic conditions,”
And they add, “An accompanying narrative will describe the key
factors underlying those assessments as well as qualitative information
regarding participants’ expectations for the Federal Reserve’s balance
sheet.”
The minutes say “most participants agreed that adding
their projections of the target federal funds rate to the economic
projections already provided in the SEP would help the public better
understand the Committee’s monetary policy decisions and the ways in
which those decisions depend on members’ assessments of economic and
financial conditions.”
But some keen observers expressed reservations after the
announcement was made, as indeed did some FOMC members.
Marvin Goodfriend, former director of research for the Richmond
Federal Reserve Bank, suggested the Fed is confusing monetary policy
with the policy instrument — the funds rate. “They’re talking about
forecasting the funds rate as if they didn’t control the thing.”
Worse, the Fed is “putting the cart before the horse,” said
Goodfriend, now a Carnegie-Mellon professor and member of the Shadow
Open Market Committee. “Transparency has to start with transparency
about the objective of monetary policy — not transparency about the
instrument.”
“Transparency about the instrument can’t substitute for
transparency about the objective,” he said, adding that the FOMC’s
decision to incorporate funds rate forecasts into its economic
projections “must be accompanied by an explicit numerical
inflation objective.”
“I’m concerned that if the Fed doesn’t follow or accompany this
with an explicit inflation target, it will be regarded as a substitute
for a policy objective,” said Goodfriend. “It could be
counterproductive” and “weaken the Fed’s credibility rather than
strengthen it.”
Mark Vitner, managing director and senior economist for Wells Fargo
Securities, said he does “not see it as all that helpful.” Indeed, “it
might add to volatility” as “people start guessing whether the data are
consistent with” the funds rate forecasts.
“It is an improvement over what was done in August (when the FOMC
announced that it expected to keep the federal funds rate near zero “at
least through mid-2013),” said Vitner, “but as a way of providing
clarity about monetary policy, it may seem that way, but when the data
start to conflict with the interest rate forecast it’s going to get
awfully murky.”
Vitner said he does “not see it providing any real benefit
to the economy” or bringing long-term interest rates down much
further.
He added that what is really needed to spur business hiring and
investment is “clarity about what tax policy is going to be in the
future … , what the regulatory environment is going to be in the
future.”
Charles Lieberman of Advisors Financial said the funds rate
forecasts “will certainly provide a lot of guidance to the market, but
the real test will come when they change the guidance.” He said the
market “will have to learn” that the FOMC can revise its funds
rate projections just as it has had to revised its projections for
GDP, unemployment and inflation.
FOMC members had their own concerns, as the minutes revealed. “Some
participants expressed concern that publishing information about
participants’ individual policy projections could confuse the public;
for example, they saw an appreciable risk that the public could
mistakenly interpret participants’ projections of the target federal
funds rate as signaling the Committee’s intention to follow a specific
policy path rather than as indicating members’ conditional projections
for the federal funds rate given their expectations regarding future
economic developments.”
Goodfriend’s fear that the Fed is not providing clarity about
its policy objective may yet be addressed.
The minutes say “a number of participants suggested further
enhancements to the SEP” and disclose that Fed Chairman Ben Bernanke
“asked the subcommittee to explore such enhancements over coming
months.”
The minutes also report that the FOMC subcommittee on
communications, chaired by Fed Vice Chairman Janet Yellen, presented “a
draft statement of the Committee’s longer-run goals and policy
strategy.”
And the minutes say “participants generally agreed that issuing
such a statement could be helpful in enhancing the transparency and
accountability of monetary policy and in facilitating well-informed
decisionmaking by households and businesses, and thus in enhancing the
Committee’s ability to promote the goals specified in its statutory
mandate in the face of significant economic disturbances.”
However, as the minutes go on to suggest, reaching consensus on an
explicit statement of monetary policy objectives won’t be easy, noting
that “a couple of participants expressed the concern that a statement
that was sufficiently nuanced to capture the diversity of views on the
Committee might not, in fact, enhance public understanding of the
Committee’s actions and intentions.”
Bernanke “encouraged the subcommittee to make adjustments to the
draft and to present a revised version for the Committee’s further
consideration in January,” the minutes add.
Meanwhile, there are lots of unanswered questions about just how
the FOMC will “incorporate information about their projections of
appropriate monetary policy into the SEP beginning in January” and about
what further changes in communications strategy might be adopted.
The SEP, which has been prepared four times a year since 2007 and
was last published in November, contains a table showing projections for
real GDP, the unemployment rate, the PCE inflation rate and the core PCE
inflation rate of all the Federal Reserve Bank presidents and all
members of the Fed Board of Governors for the coming three years.
“Longer run” projections, often thought of almost as Fed targets,
are included for GDP, unemployment and the overall PCE inflation rate.
The table gives both the “central tendency” forecast, which
excludes the three highest and three lowest projections for each
variable in each year, and the range of all projections.
The minutes make fairly clear that the FOMC will not be providing a
common path for the funds rate over three years and beyond. Beyond that,
the exact form that the funds rate projections will take has not been
announced, but it is almost certain that the SEP will include the full
range of projections by the 17 FOMC participants (19 if and when two
presidential appointees to the Board are confirmed by the U.S. Senate).
-more- (1 of 2)
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