Does Bernanke’s clearer ‘Fed speak’ make him a better steward of the U.S. economy?
This past summer, Alan Greenspan, the former Federal Reserve chairman, told a magazine how he’d practice the opaque dialect known as “Fed-speak” in his nearly two decades leading the U.S. central bank.
He said to Bloomberg Businessweek that he would think about whether a sentence he might utter could move markets — and if it could, he’d resolve “the sentence in some obscure way which made it incomprehensible.”
Like Greenspan, the current Fed chairman, Ben S. Bernanke, also has a degree from the school of Fed-speak— in addition from Harvard and MIT. But while Greenspan was famously obfuscatory, Bernanke has pushed in the opposite direction. He has moved the central bank away from ambiguity and toward specificity, a shift that culminated in Wednesday’s decision to link Fed policymaking to numeric targets for unemployment and inflation.
The announcement that the Fed would keep interest rates close to zero until unemployment falls to 6.5 percent or inflation looks likely to exceed 2.5 percent was a historic moment for the central bank.
Bernanke described the policy Wednesday — although his desire for clarity did not mean he was abandoning a penchant for dense, jargony prose.
“The modified formulation makes more explicit the [Fed’s] intention to maintain [low interest rates] as long as needed to promote a stronger economic recovery . . . , a strategy that we believe will help support household and business confidence and spending,” he told reporters. “By tying future monetary policy more explicitly to economic conditions, this formulation of our policy guidance should also make monetary policy more transparent and predictable to the public.”
Yet the big question that remains is whether this clearer approach has simply made the reticent economics professor a better communicator — or a more effective steward of the nation’s economy.
There’s little question that Bernanke, in particular, tends to talk in plainer language than his predecessor. Fed chairmen used to never give on-the-record interviews, but he has added four news conferences a year following policymaking meetings, and has made numerous media appearances.
But those shifts are more stylistic than substantive — giving a human face and voice to unconventional and controversial actions the Fed has undertaken in the past five years.
The substantive changes involve what the Fed says publicly about its policies. For most of its history, it said little. In the mid-1990s, the central bank for the first time declared its target for short-term interest rates, which can have a dramatic effect on economic activity — and are largely the purview of the Fed.
The changes have been even more dramatic under Bernanke, in part out of necessity. In late 2008, during the financial crisis, the Fed lowered short-term interest rates to near zero in an effort to stimulate economic activity. But that was not enough to push the economy into a vibrant recovery.
With short-term interest rates that it controls near zero, the Fed had two other tools at its disposal. First, it effectively printed dollars and bought assets — in particular U.S. government bonds and mortgage bonds — to inject money into financial markets, sending other interest rates down.
But beyond that, the Fed could also try to reassure markets that it was not going to stop buying bonds or raising rates until the economy got much better. This is where communications and policymaking meet. Many of the world’s leading economic thinkers believe the Fed’s greatest power is in setting expectations, especially when short-term interest rates are near zero.
According to this theory, convincing the public that interest rates will stay low for a long time can encourage consumers and businesses to do the things that make the economy chug along — borrowing, buying and hiring.
The Fed began to embrace this theory in late 2008, when it pledged to keep interest rates low for a while. But confusion remained about precisely how long this meant. It was not until last year that the Fed gave a date for when it might reverse course — initially 2013, then 2014 and then 2015.
This year, the Fed pushed further but with uneven results. In January, the Fed set a long-range inflation target of 2 percent, but markets weren’t clear if it was doing so out of a commitment to fighting inflation or to buy room to take more aggressive measures to combat unemployment. And many prominent economists ripped into the Fed, and Bernanke, for not taking even more aggressive action.
In the past four months, however, Bernanke did take significant new actions, although he tends to describe them in more iterative than dramatic terms. Beginning in September, the Fed said it would not only hold rates low until 2015 but keep them low after the economic recovery begins to strengthen. It also announced a new bond purchase program that was open-ended, solving a critique of previous programs — that they were date-certain to end.
And then Wednesday, the Fed outlined, with a greater degree of precision than ever before, the exact thresholds that might cause it to back away from ultra-low interest rates. But with Fed projections showing unemployment still well above 6 percent well into 2015, that won’t be anytime soon.