Communicating Fed policies ahead..

FOMC minutes of meeting held on 3 Nov were released yesterday. Like previous meeting minutes this one also provides lots of economic and financial markets developments.

What was more interesting was Fed’s concerns over communicating its policies to public. The minutes open with:

The meeting opened with a short discussion regarding communicating with the public about monetary policy deliberations and decisions. Meeting participants supported a review of the Committee’s communication guidelines with the aim of ensuring that the public is well informed about monetary policy issues while preserving the necessary confidentiality of policy discussions until their scheduled release. Governor Yellen agreed to chair a subcommittee to conduct such a review. 

There was a videoconference on October 15, 2010 where these issues were discussed:

The Committee met by videoconference on October 15 to discuss issues associated with its monetary policy framework, including alternative ways to express and communicate the Committee’s objectives, possibilities for supplementing the Committee’s communication about its policy decisions, the merits of smaller and more frequent adjustments in the Federal Reserve’s intended securities holdings versus larger and less frequent adjustments, and the potential costs and benefits of targeting a term interest rate. The agenda did not contemplate any policy decisions and none were taken.

Couple of suggestions were offered:

Participants agreed that greater public understanding of the Committee’s interpretation of its statutory objectives could contribute to better macroeconomic outcomes.

Participants expressed a range of views about the potential costs and benefits of quantifying the Committee’s interpretation of its statutory mandate to promote price stability by adopting a numerical inflation objective or a target path for the price level.

In the end, participants noted that the longer-run projections contained in the Summary of Economic Projections, which is released once per quarter in conjunction with the minutes of four of the Committee’s meetings, convey considerable information about participants’ assessments of their statutory objectives.

Participants discussed whether it might be useful for the Chairman to hold occasional press briefings to provide more detailed information to the public regarding the Committee’s assessment of the outlook and its policy decision making than is included in Committee’s short post-meeting statements.

Fed wants to increase transparency in communications (see my paper on this). Bernanke regular press briefings is a new tool to increase transparency. Though, it has not been accepted yet.

Also  see the new projections. Growth lower than June Projections, Unemployment higher than June Projections…

There were discussions over whether Fed should change its balance sheet in incremental or one time large-scale changes. And also on whether Fed should target a term-interest rate (bond yield):

In their discussion of the relative merits of smaller and more frequent adjustments versus larger and less frequent adjustments in the Federal Reserve’s intended securities holdings, participants generally agreed that large adjustments had been appropriate when economic activity was declining sharply in response to the financial crisis. In current circumstances, however, most saw advantages to a more incremental approach that would involve smaller changes in the Committee’s holdings of securities calibrated to incoming data.

Finally, participants discussed the potential benefits and costs of setting a target for a term interest rate. Some noted that targeting the yield on a term security could be an effective way to reduce longer-term interest rates and thus provide additional stimulus to the economy. But participants also noted potentially large risks, including the risk that the Federal Reserve might find itself buying undesirably large amounts of the relevant security in order to keep its yield close to the target level.

 Hamilton has some more suggestions:

Here then is my suggested Fed communication strategy. The Fed should make clear that it is concerned about stagnating wages and income, that it has the tools to prevent a widespread deflation, and that it can and will prevent such a deflation. The Fed should also acknowledge that no policy it follows can reduce the unemployment rate to acceptable levels quickly, and that if the Fed were to attempt to do so on its own, it would create more problems than it solves.

And here’s my advice for how the Fed might approach the incoming congressional leaders:

Come now, let us reason together

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