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Wednesday, May 03, 2006

The Clarity of Fed Communications

Econbrowser, The New York Times, The Wall Street Journal, a WSJ editorial, and Bloomberg all weigh in on the issue of the clarity of Fed communictions (econbrowser and Tim Duy's post have additional links) with econbrowser saying "many pundits are using the wrong paradigm for interpreting the public pronouncements of the new Federal Reserve Chair." My own not entirely unbiased view differs a bit. I think Tim had it right - the fact that so much is being written, quoted, and debated shows the Fed did not do as well as it might at communicating its intentions.

When teaching a class, the main point or the derivation of a result can seem quite clear, obvious, evident, "easily shown that;" it seems like students ought to easily get the idea. If they have trouble, reading your notes over again and again might convince you that the message is clear and you might take solace in the few top students who figure it out. In such a case, expecting the rest of class to listen better or study harder might work, but if you get the blank stare, if they don't understand or are confused about the point you are trying to make, then I think it's up to you to try and find a better way to communicate the material and make the message clear. Fortunately, with the next rate move largely locked in, if the Fed still feels misread there's a lot of time left to clarify the message through traditional channels before its next meeting.

As for policy, like Tim, who said:

The path of future policy depends upon their revisions of that forecast. If incoming data triggers a revision of that forecast, then the path of policy will change accordingly. No rate hikes are guaranteed. No pause is guaranteed either.

Jim Hamilton at econbrowser is emphasizing the data dependent nature of the current policy trajectory as well:

So, is the Fed going to pause at 5%? I don't know, you don't know, the pundits don't know, and Bernanke himself doesn't know. It's going to depend on incoming data.

I just want to add the minor note that because of policy lags and the noisy nature of the data, it is not the incoming data itself that matters, it is how the data affect forecasts of future economic conditions.

    Posted by on Wednesday, May 3, 2006 at 12:15 AM in Economics, Monetary Policy | Permalink  TrackBack (1)  Comments (1)


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