Tomorrow, June 4, we will present our paper, Improving U.S. Monetary Policy Communications, as part of the Federal Reserve’s review of its monetary policy strategy, tools, and communications practices. This post summarizes our methodology, analysis and recommendations.
Since the mid-1990s, the U.S. economy has been reaping the benefits of a credible commitment to price stability, including a communications framework that reinforces that commitment. Over the same period, both the level and uncertainty of inflation have declined (see here). It is against this backdrop that we look for further enhancements in the Federal Open Market Committee’s (FOMC) communications framework. Read More
When it comes to forecasting, we usually cite famous Yankee catcher and baseball philosopher Yogi Berra, who reputedly said: “It's tough to make predictions, especially about the future.”
For central bankers, this is more than just a minor headache. Given the lags between policy actions and their effects, forecasting is unavoidable. That puts uncertainty about the economic outlook at the heart of the policymakers’ daily job. Indeed, no one knows the future path of the economy or interest rates—not even those making the decisions.
Communicating this inevitable monetary policy uncertainty is difficult, but essential. In the United States, the Federal Open Market Committee (FOMC) uses a variety of means for this purpose. In two earlier posts, we discussed the evolution of FOMC communications and the usefulness of the quarterly survey of economic projections (SEP). Here, we examine a key aspect of FOMC communications that receives insufficient attention: the explicit publication of policymakers’ range of uncertainty about the future path for the policy rate. Buried near the end of the FOMC minutes, published three weeks after the SEP release, this information is consumed only by die-hard devotees…. Read More
Following their January 2019 meeting, the Federal Open Market Committee (FOMC) came in for intense criticism. Instead of a truculent President complaining about tightening, this time it was financial market participants grumbling about a sudden accommodative shift. In December 2018, Fed policymakers’ suggested that, if the economy and market conditions evolved as expected, they probably would raise interest rates further in 2019. Faced with changes in the outlook, six weeks later they altered the message, suggesting that going forward, monetary easing and tightening were almost equally likely.
We find the resulting outcry difficult to fathom. The FOMC’s perceptions of the outlook may have been incorrect in December, in January, or both. There are myriad ways for economic and market forecasts to go wrong. But, to secure their long-run objectives of stable prices and maximum sustainable employment, isn’t it sometimes necessary for policymakers to change direction, and when they do, to explain why?
The point is that the recent turmoil arises at least in part from the Fed’s high level of transparency. In this post, we summarize the evolution of Federal Reserve communication policy over the past 30 years, and discuss the importance and likely impact of these changes. While transparency is far from a panacea, we conclude that the evolution has been useful for making policy more effective and sustainable, and remains critical for accountability and democratic legitimacy…. Read More
The problem of time consistency is one of the most profound in social science. With applications in areas ranging from economic policy to counterterrorism, it arises whenever the effectiveness of a policy today depends on the credibility of the commitment to implement that policy in the future.
For simplicity, we will define a time consistent policy as one where a future policymaker lacks the opportunity or the incentive to renege. Conversely, a policy lacks time consistency when a future policymaker has both the means and the motivation to break the commitment.
In this post, we describe the conceptual origins of time consistency. To emphasize its broad importance, we provide three economic examples—in monetary policy, prudential regulation, and tax policy—where the impact of the idea is especially notable.... Read More
Sixteenth birthdays can be momentous occasions. A coming of age of sorts. Well, New Year’s Day 2015 the European Central Bank turned 16. It is a momentous birthday, but not all that sweet.
To be sure, there is notable good news. The new headquarters in Frankfurt recently opened. Lithuania has entered the euro area. The frequency of ECB monetary policy meetings is about to decline. And there will soon be timely publication of minutes of these meetings.
But the risk of deflation amid sustained economic weakness makes for a very anxious birthday... Read More
Nearly 30 years ago, the satirical Spy magazine began posing the now-familiar question – “separated at birth?” – above lookalike images of two unconnected public figures. Donald Trump was paired with Elvis Presley, Marie Osmond with Monica Lewinsky, and the list goes on (and on). Had Spy found humor in juxtaposing institutions rather than personalities, it still wouldn’t have landed on the Fed and the ECB (which didn’t yet exist): their buildings look nothing alike... Read More
Central bank communication is a work in progress everywhere, but particularly so in the euro area.
Unlike the Fed, the Bank of England, and the Bank of Japan, which all publish minutes of their policy meetings with a lag of a few weeks, current ECB rules anticipate releasing summary records of Governing Council meetings only 30 years after they occur. Read More