Fed Transparency

Here's an idea for additional transparency into Fed thinking. Suppose we require that each of the twelve members of the Federal Open Market Committee (the committee that sets the federal funds rate) post their stance on monetary policy once per day on a central web site.

On the Fed's main web site there would be a page listing each Committee member's answer to the question "If I had to set the federal funds rate today, I would set it at ____" and a table would list all twelve answers along with the last time the answer was updated, Committee members would be required to update their answer at least once per day, even if there is no change, and they could update it more often if desired, e.g. in response to news about the economy (the basic unit of time could be weekly as well). It would probably be best if the votes were anonymous, but that isn't essential.

I haven't thought this through, just one of those things that pops into your head, but it does seem to take away some of the uncertainty about the course of policy. What are the problems with this? Would this be viable? It wouldn't resolve all uncertainty about the outcome of FOMC meetings, but most of the time market participants would have a pretty good idea what to expect.

Comments

[Winslow R.]

"It wouldn't resolve all uncertainty about the outcome of FOMC meetings, but most of the time market participants would have a pretty good idea what to expect."

This part of the system hardly seems broken, so why bother 'fixing' it? Everyone seems to agree the Fed will lower rates 1/4 point at most tomorrow if at all. The huge discrepency you are seeing in 'expectations' comes from the 'market' not really being a market after all.

Something you are surprised to see?

What seems to be broken is how funds are accessed/stored once the rate is set. The limited availability and safe storage capacity of funds at that rate is causing the system to malfunction. Blame a lack of U.S. deficit spending providing sufficient tsy secs for foreign sovereign wealth funds.

[Mark Thoma]

Everyone agrees? Right now, the market is split between .25 and .50:

http://www.clevelandfed.org/research/Policy/fedfunds/index.cfm

See here too:

http://www.cbot.com/cbot/pub/cont_detail/0,3206,991+23425,00.html

[Winslow R.]

I should clarify.

Everyone - someone that I listen to :)

[Allan Niemerg]

I dunno...

If each of the FOMC had to decide once every day what the fed funds rate should be, wouldn't that encourage a short term outlook, i.e., they would be more easily influenced by the events of the day? It seems to me, that patiently considering the issue over a longer period allows for deeper contemplation of longer term macroeconomic trends and helps insulate the members(somewhat) from whatever is on the mind of Wall Street that day.

[dk]

Isn't increased transparency exactly not what we want?

If I remember correctly, according to Efficient Markets Hypothesis, monetary policy uses much (all?) of its power if the market can forecast what is going to happen.

Obviously you can't keep all information hidden, because fed-watchers know what the goals of the fed are. But at least some level of uncertainty seems like a good thing.

[gordon]

I'll go one better: the Open Market Committee should be elective, with candidates proposing their interest rate policies as part of their campaigns.

[Lafayette]

MT: I haven't thought this through ...

Obviously.

The ruminations of the Fed, like any central bank authority, are best kept "confidential" if not secret.

The intent of the Fed Board is collegiality, but within a confine that shows outward solidarity even when inwardly nothing of the kind exists. It's the image that counts in managing their "business".

Managing financial policy is NOT a place where the world should be looking through the windows for hints/tendencies/insider information. It is not a democratic but collegial process, meaning that decision making is tediously slow -- unlike corporate affairs.

Making that college an object of media interest (or fantasy) would make their jobs impossible. And, they would then attract the people -- like public prosecutors, for instance -- who might use the post as a media trampoline for a political career.

I suspect that America has had enough of that ilk. In spades.

NB: Would anyone suggest the same sort of "inward view" of the Supreme Court during its internal judgment making process?

[spencer]

I agree with Lafayette. Having the voting members post their position in advance would be a very bad idea. They would go into a meeting prepared to defend their public position rather than prepared to listen and learn and reach a consensus. It would lead to a lot of posturing so that the meetings might come to look more like a Senate hearing.

[Lafayette]

G: the Open Market Committee should be elective, with candidates proposing their interest rate policies as part of their campaigns.

Yeah, right ... with bankers funding a highly mediatized campaign for their favorite candidate.

That way, once elected, the banks can determine i-rate policy by just by making a phone call.

Duhhhhhh ....

[richard]

I suspect Mark may be attracted to the quantitative nature of this exercise. Just imagine a time series of daily estimators of market rates over a ten year period . . . think of the things you could do with that data!

I agree with most of the objections raised above, but if we're going to engage in a fantasy exercise, how about this one: members post a rate on a web site, which remains the same until the member updates it. The Fed rate is continually updated as the average (or, if you prefer, the median) of the preceding 30-day rate. The markets now have a relatively smooth function which gradually is altered or modified according to the prevailing "mood" of the members of the committee.

[Lafayette]

richard: The markets now have a relatively smooth function

Interesting proposition. But, you are trying to take the "risk" out of "risk".

Meaning this: rate fluctuations are an integral part of estimating the risk of a venture (for which funds are necessary and the i-rate determines their price). Your proposition attempts to take out (or at least reduce) the "risk element" involved.

This will change matters considerably, and not necessarily for the better. Consider the sub-prime loan mess. What would have been, in your opinion, the rates the Fed policy makers would have entered (into your opinion survey) prior to the bubble's puncture?

Not very different, I think than what they actually were. However, banks would have expanded even further their idiot-lending (or lending to idiots) assured by your Fed-member "rate prognosticator". The consequence would have been even worse.

Let's learn to live with risk. It ain't such a bad thing. Like everything, it has to be taken in moderation. And speculation, with real estate or equity, is never in moderation. So, the risk of a bubble suddenly going "phssshittttttt!" -- well, that is goodness to my mind.

If some prospect is too good to be true, then it probably isn't. That is what the sub-prime mess has taught us once again.

Have we learned anything? Frankly, I doubt it. Our next bubble is not more than ten years away. Why? Because speculation is a human attribute, not an economic variable, sparked by the cultural value of wealth accumulation as a prevalent incentive. About all we can do is regulate it ... as the Fed has done (today) by "repricing risk".

And, when the human desire to accumulate riches quickly (as in, "Flip-a-condo today! Everybody's doin' it!") based upon speculative pricing, then humans get carried away by their emotions and not their intelligence.

Doing away with risk, I suggest, is just not in the cards.