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Tuesday, October 25, 2005

Will the Transparent Fed Open the Drapes a Little More?

Caroline Baum discusses how financial market confidence in the Fed as an institution has changed smoothing the path for Bernanke to take the helm, Bernanke's commitment to price stability (here too by Brad Delong), whether the Fed will become more democratic under Bernanke, and whether there will be further moves towards transparency and explicit inflation targeting. Quotes from Frederic Mishkin are included:

Transparency Wins, Fed Leaks Lose, With Bernanke, Caroline Baum, Bloomberg: There were no fireworks in the financial markets yesterday, the way there were when Paul Volcker announced he was stepping down ... President George W. Bush's announcement yesterday that he was nominating former Fed governor Ben Bernanke ... to succeed Greenspan created no such jitters. Look how far we've come! Central banking has evolved ... to the point that investors understand that the institution is larger than any one person ... There will be some obvious changes at the Bernanke Fed --none of which will be quick as policy innovation moves at a glacial pace. What won't change is the central bank's commitment to price stability. "Ben has said that there is no inconsistency in the Fed's dual mandate'' of maximum sustainable economic growth and price stability, says Frederic Mishkin, professor of banking and finance at Columbia University's Graduate School of Business and a former research director at the New York Fed. Mishkin ... says there will be more "open discussion'' at the Fed ... "Ben is a listener and will build consensus,'' ... Unlike Greenspan, who resisted an explicit inflation target and ... Bernanke is likely to advance the cause and communicate clearly, Mishkin says. ...

There is something to be said for a rules-based policy as opposed to Greenspan's seat-of-the-pants approach, no matter how well one thinks it succeeded. If the central bank is precise about its goals, offering up a numerical inflation target ... takes the guesswork out of what constitutes price stability, which inflation measure expresses it best and how many exclusions (food and energy?) are legitimate. Just because a central bank has an explicit inflation target doesn't mean it has a playbook on how to achieve it. "An inflation target doesn't tell you how to set the policy instrument,'' Mishkin says, referring to the overnight federal funds rate...

In 2003, ... Bernanke advocated using forward- looking language to bring long-term rates down. His willingness to use verbal guidance ... suggests the prospective language included in the statement released following Fed meetings will remain for now. Two ... differences come to mind in contemplating how the Fed would differ under Bernanke. His focus on transparency suggests Greenspan's anointed Fed reporters may be out of luck, at least in terms of printing comments from unnamed Fed officials. It would be out of character for him to disseminate information in a way that opens the door to questions of who actually said and meant what. Second, Bernanke is apt to restrict himself to comments on monetary policy. He appeared uncomfortable enough commenting on the monthly employment report to the TV audience in his role as chairman of the President's Council of Economic Advisers. He's not likely to advocate or criticize specific fiscal policies (tax cuts, for instance) in his job as Fed chairman, other than to remind his congressional inquisitors that they need to put their house in order. In return, let's hope they stay out of his.

Yes, let's hope they do. But I do hope Bernanke will speak out when other parts of government take actions that have the potential to feedback upon and affect monetary policy.

    Posted by on Tuesday, October 25, 2005 at 01:02 PM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (2)


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