A nice speech by Fed chair Ben Bernanke.
He answers five qs on Fed and mon policy:
- What are the Fed’s objectives, and how is it trying to meet them?
- What’s the relationship between the Fed’s monetary policy and the fiscal decisions of the Administration and the Congress?
- What is the risk that the Fed’s accommodative monetary policy will lead to inflation?
- How does the Fed’s monetary policy affect savers and investors?
- How is the Federal Reserve held accountable in our democratic society?
I am not going into the objectives as much is known and greatly debated. However, for students it is still a reasonable read.
What I noted was this interesting development. Now we know Fed is basically responsible for both unemployment and inflation. But it was inflation which clearly looked like the single goal. That is what Fed and its officials communicated in their speeches. Unemp was clearly an abandoned goal.
Now Fed guys always mention it and this speech sort of mentions it ahead of price stability. Couple of paras from Bernanke’s speech :
As the nation’s central bank, the Federal Reserve is charged with promoting a healthy economy–broadly speaking, an economy with low unemployment, low and stable inflation, and a financial system that meets the economy’s needs for credit and other services and that is not itself a source of instability.
..But today I want to focus on a role that is particularly identified with the Federal Reserve–the making of monetary policy. The goals of monetary policy–maximum employment and price stability–are given to us by the Congress. These goals mean, basically, that we would like to see as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable.
…At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires.
…I can assure you that my colleagues and I will carefully consider how best to foster both of our mandated objectives, maximum employment and price stability, when the time comes to make these decisions.
The Federal Reserve was created by the Congress, now almost a century ago. In the Federal Reserve Act and subsequent legislation, the Congress laid out the central bank’s goals and powers, and the Fed is responsible to the Congress for meeting its mandated objectives, including fostering maximum employment and price stability.
So many times you not unemployment mentioned before prices. Not saying that this indicates any order but a clear shift.
Dan Thornton of St Louis Fed had alerted on this development. So had Aaron Steelman at Richmond Fed.
Recently released FOMC minutes say:
Many participants thought that more-effective forward guidance could be provided by specifying numerical thresholds for labor market and inflation indicators that would be consistent with maintaining the federal funds rate at exceptionally low levels.
However, reaching agreement on specific thresholds could be challenging given the diversity of participants’ views, and some were reluctant to specify explicit numerical thresholds out of concern that such thresholds would necessarily be too simple to fully capture the complexities of the economy and the policy process or could be incorrectly interpreted as triggers prompting an automatic policy response. In addition, numerical thresholds could be confused with the Committee’s longer-term objectives, and so undermine the Committee’s credibility.
At the conclusion of the discussion, most participants agreed that the use of numerical thresholds could be useful to provide more clarity about the conditionality of the forward guidance but thought that further work would be needed to address the related communications challenges.
For inflation the threshold already is 2%. I doubt whether Bernanke and co. will say ” Will ease policy till inflation touches 4% or so”. Instead they might say “Will ease policy till unemp touches 5% etc”. This was suggested by Chicago Fed chief Evans earlier and may be he is the key influencer here..
Interesting times..
