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
The Federal Reserve began to consider just how far its balance sheet consolidation should go well before the tapering actually began nearly a year ago. Earlier staff analyses pointed to a gradual runoff of long-term debt that could take years to reduce Fed assets to a new long-run equilibrium. More recently, market observers have speculated about an early end to consolidation that would result in a higher steady-state level.
Yet, as a recent Wall Street Journal article highlights, policymakers and analysts have devoted less attention to the mix of assets that the Fed should select once the balance sheet shrinks to its long-run equilibrium and policymakers allow it to expand slowly—say, in line with the increase of demand for currency.
In this post, we argue that the Fed should aim in normal times—when the economy is expanding and absent any financial strains—for a portfolio that has minimal liquidity, maturity and credit risk. In practical terms, this means that their portfolio should be composed largely of Treasury bills and short-term notes, with an average maturity that is very short…. Read More
How and what should the Federal Open Market Committee (FOMC) communicate to make monetary policy most effective? That is the question addressed by this year’s U.S. Monetary Policy Forum report (Language After Liftoff: Fed Communication Away from the Zero Lower Bound).
Over the past two decades, the FOMC has made enormous strides in promoting transparency. In sharp contrast to most of its previous history, the Fed now emphasizes that transparency enhances the effectiveness of monetary policy.
Yet, central bank communication is a work in progress. And, as the new USMPF report argues, there remains scope for improvement. In our view, the simplest and most useful change that the authors recommend, and that the Fed could implement—immediately and without cost—is to “connect the dots:” that is, to link (while maintaining anonymity) the published interest rate forecasts of each FOMC participant that appear in the quarterly “dot plot” (found in the Summary of Economic Projections, or SEP) to that same person’s projections of inflation, unemployment, and economic growth. Read More