January 4, 2013


The New Tell-All Fed (RANDALL S. KROSZNER, 1/03/12, NY Times)

[T]the fewer surprises and mixed messages in communication there are, the more likely the Fed's efforts to shore up the American economy will be effective. In this regard, the central bank's newest strategy of talking about itself -- and notably, of its decision to tie its interest-rate moves to an unemployment threshold -- is a great step forward in economic stewardship. Now, everyone knows what criteria Fed officials are using to guide future policy.

As stark as this move to transparency may seem, it has actually been some two decades in the making. An unlikely proponent was Mr. Greenspan himself when, under his chairmanship, the Fed began to issue brief explanations after each monetary policy meeting, including the votes of each member of the Federal Open Market Committee, the central bank's policy body. This was in contrast to the first eight decades of the Fed's existence, when the Fed would simply buy or sell securities in the market to try to affect credit conditions -- so-called open market operations -- without acknowledging its actions or revealing its intentions.

Under Mr. Bernanke, lips have loosened rapidly with quarterly news conferences, forecasts by F.O.M.C. members of key economic indicators, countless testimonies before Congress and, now, the explicit adoption of a 2 percent inflation goal.

The advantage of such glasnost is that it can give the Fed greater bang for its buck. Buying more government bonds may bring down interest rates today, but getting people to believe that the Fed will continue such "accommodative" policies adds to the potency of its actions in two ways: expectations of future borrowing costs stay low, and uncertainty about future monetary policy (and hence, future borrowing costs) declines. Such knowledge lets firms be more confident about investing and hiring, and gives homeowners and potential home buyers more faith that mortgages will stay affordable, providing support for the housing market.

Entirely fitting that it is W's chairman who has made the Fed a more republican institution.
Posted by at January 4, 2013 5:18 AM

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