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Thursday, October 25, 2007

Fed Plans to Increase Transparency

The Fed is moving to increase transparency:

Fed Plans Transparency Steps, by Greg Ip, WSJ: 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... Moreover, the horizon for those forecasts would be extended to three years from two.

The ... Fed had hoped to finalize them by this month. But the fallout of the market turmoil that erupted in August has complicated the agenda of next week's meeting of the policy-making Federal Open Market Committee and it may defer decisions on its communications policy to a later meeting. ...

While the idea of setting an inflation target hasn't been shelved, officials say it needs more discussion. ... For Mr. Bernanke, deferral of an inflation target represents a setback, but he can chalk up a tactical victory for forging a consensus on other steps. ...

At his nomination hearing in 2005, Mr. Bernanke restated his preference for a target while promising "extensive discussion and consultation" and "no precipitate steps." ...

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.

At present, the FOMC meets eight times a year, and at two of its meetings, members submit forecasts for the current and next year on growth, inflation and unemployment that are included in a report to Congress. The "central tendency" of those forecasts -- a range that excludes the extreme projections -- garners the most attention. ...

At present, the post-meeting FOMC statement and the minutes aren't expected to be altered significantly.

A recent paper by Orphanides and Wieland is related to the release of the economic forecasts more often and with more detail. According to this paper from a recent conference at the St. Louis Fed, the "midpoints of the central tendencies" used as "proxies for the modal forecasts of FOMC" are better at explaining policy decisions and deviations from the Taylor rule than data on actual economic conditions. Simply put, if you want to understand the Fed's policy decisions, look at the FOMC forecasts, not the actual data on the economy available at the time:

Economic Projections and Rules-of-Thumb for Monetary Policy, by Athanasios Orphanides and Volker Wieland, October 2007: Abstract Monetary policy analysts often rely on rules-of-thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple policy rule... One interesting question is whether such rules-of-thumb should draw on policymaker forecasts of economic conditions or recent outcomes of key variables such as inflation and unemployment. ... We investigate this proposition in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC's own projections rather than recent economic outcomes. Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections.

    Posted by on Thursday, October 25, 2007 at 12:15 AM in Academic Papers, Economics, Monetary Policy | Permalink  TrackBack (1)  Comments (3)


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