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October 25, 2007
Fed increasing transparency
Grep Ip writes in the Wall Street Journal:
WASHINGTON -- Federal Reserve officials are nearing consensus on several steps to make their deliberations more transparent to the public, but are likely to defer one of Chairman Ben Bernanke's longstanding goals: an explicit inflation target.
The centerpiece of their new communications steps would be the release of economic forecasts of policy makers four times a year, instead of the current two times, with additional detail and background, according to people familiar with the matter. Moreover, the horizon for those forecasts would be extended to three years from two.
Trying to set a target without really setting a target?
While the idea of setting an inflation target hasn't been shelved, officials say it needs more discussion. Meanwhile, they see the longer forecast horizon as an interim step with many of the benefits of an inflation target. The public could assume the Fed expects to achieve its desired inflation rate in three years and thus a third-year forecast amounts to a target. The forecast approach sidesteps the biggest problems with an official number: the misgivings some officials still have with a target, potential political fallout and the difficulty of agreeing on the right number.
...
At his nomination hearing in 2005, Mr. Bernanke restated his preference for a target while promising "extensive discussion and consultation" and "no precipitate steps." After he became chairman, he began making greater use of the FOMC forecasts to explain Fed policy. He also appointed Fed Vice Chairman Donald Kohn, like Mr. Greenspan a skeptic of targets, to head a subcommittee on communications. Mr. Kohn has shown signs of warming to the notion. In September, he said in a speech he was "relatively more persuaded" that targets help anchor the public's expectations of inflation.
Mr. Kohn is an important figure on the Board. If he comes around, there is a chance. But a big obstacle still remains at the other end of Constitution Avenue, and the committee is rightly cautious.
The FOMC as a whole is still not ready to take the step. One concern is that Congress, having taken a more populist turn since Democrats took power in 2006, could perceive a target as subordinating the Fed's responsibility for employment, despite Mr. Bernanke's insistence to the contrary. Another is that officials don't think the current system is broken.
No, it's not broken, but nor was it broken when many of the other steps toward transparency were taken. In principle, a target would certainly help to anchor expectations. And as a practical matter, a three year forecast might work as a reasonable proxy for an operational target even if nothing is written in stone. Additional releases of forecasts are surely welcome to any observers of the Fed out there.
I look forward to more of this.
Posted by William Polley at October 25, 2007 9:55 AM
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