In his memoir, The Courage to Act, Ben Bernanke cites efforts to make monetary policy more transparent as a fundamental achievement of his tenure as Federal Reserve Chairman. Specifically, Bernanke explains that:
“The Fed now fashions monetary policy within a formal framework that includes a 2 percent inflation objective and a commitment to take a balanced approach whenever its inflation and employment goals conflict. The chair’s press conferences, the expanded economic and interest rate projections by FOMC participants and the lively debate evident in Fed policymakers’ speeches (emphasis added) contribute to provide the Congress, the public and the markets with considerable information about the Fed’s strategy and its rationale.” (p.572)
We applaud the Fed’s willingness under Bernanke and Janet Yellen to announce publicly its commitment to a 2 percent inflation target and acknowledge the consistency of its statements regarding a balanced approach to stabilizing inflation and unemployment. This information makes clear what the central bank hopes to achieve with its monetary policies over both intermediate and longer horizons. At the same time, however, we join others in wondering whether the “lively debate” that continues to be evident in the frequent, but often conflicting statements of Fed officials clarifies or confuses what monetary policy is doing and why.
Former Federal Reserve Governor Frederic Mishkin recognized this tension in his statement to the Federal Open Market Committee in 2008:
“What I have been very concerned about … is that recently I had a very prominent central bank governor say to me ‘What in the hell are you guys doing?’ The issue here is that we need to have a situation where Bank presidents and also members of the Board can speak their views. They may have different views, and I very much encourage that in terms of discussion, of where they think the economy is going, which is what we do inside…. What is very problematic from my point of view are the speeches, discussions, and interviews outside, when people talk about where they think interest rates should head and where the policy rate should head. That’s where the criticism has been coming from. I have to tell you that a lot of people whom I respect tremendously are saying to me that it’s making us look like the gang that couldn’t shoot straight. I think it’s a really serious problem. I understand that we want to keep the priority of speaking our minds, but we have to work as a team, and I think we’re having a problem in that regard.” (Transcript of August 5, 2008 FOMC Meeting, pp.124-5)
A bit later in his comments, Mishkin explained why this type of “Fedspeak” can be harmful:
“One (danger) is that it weakens the confidence in our institution…. It will hurt us in terms of policy because it will weaken our credibility, which actually will make it harder to control inflation.” (FOMC Transcript, p.125).
In judging whether open debate among Fed officials reinforces or interferes with Bernanke’s goal of transparency, it helps to consider this comment, from N. Gregory Mankiw’s blog:
“Under perfect transparency, markets would react to Fed remarks with a yawn. Traders would say, ‘Of course, he would say that, given the data we have all seen lately. None of that verbiage changes my view about the course of monetary policy.’ Macroeconomic data would move markets; remarks by Fed officials would not.”
As we noted in a previous column for E21, speeches by Federal Reserve officials regularly do move stock and bond prices. Thus, if Mankiw’s interpretation of transparency is correct, the concerns expressed by Mishkin appear genuine: the “lively debate” among Fed policymakers seems to be creating more confusion than clarity.
This month various Fed officials have given speeches, sometimes on the very same day, calling for or predicting very different policy outcomes. On October 8, for instance, Minneapolis Bank President Kocherlakota argued that the Fed should lower rates, even as San Francisco Bank President Williams suggested that rates would move higher by the end of the year. And on October 12, Fed Governor Lael Brainard not only argued against tightening policy but challenged the economic reasoning used by Chair Yellen and Vice-Chair Stanley Fischer to justify a rate increase in the near term, while, on the same day, other FOMC members supported Yellen and Fischer’s views. Any observer would struggle to find sense in all this talk, and come away suspecting, instead, that the FOMC is deeply divided and that, as a result, almost anything could happen. Perhaps, rather than acting competitively, advancing their own personal views of what the Fed ought to do with its policy rates, FOMC members could heed Mishkin’s advice, and redouble their efforts to work as a team. By doing so, they would make their behavior seem less confusing – and more transparent, too.