Fed policymakers mull how to share economic goals and expectations
By Neil Irwin,
When Federal Reserve policymakers meet to decide the nation’s monetary policy, they usually discuss where the economy is heading and how they should adjust interest rates to try to keep prices stable and Americans employed.
At their meeting this week, bigger ideas will be on the table. No major policy changes are expected out of the two-day session beginning Tuesday, but the discussion will probably focus on some core questions about how the central bank communicates with the public about its goals and expectations for the economy.
Should the Fed release more explicit information about what it expects to happen to the economy and its policies over the coming years? How much inflation should it tolerate as it tries to get the economy back to full employment?
Chairman Ben S. Bernanke will take questions from the media Wednesday afternoon during his regular quarterly news conference, which will give him the opportunity to explain what, if any, consensus the Fed policy committee reached on those questions.
Bernanke has long advocated “inflation targeting,” the idea of naming a specific goal for the Fed’s intended level of inflation — and, in a way, the central bank is already doing just that. The Fed announces each quarter what its top policymakers view as the appropriate amount for consumer prices to rise each year in the longer term; as of June, they thought that was 1.7 to 2 percent. One option for the near future would be for the Fed’s policy committee to more explicitly state that as its target.
Such a move would be the latest in a long series of incremental Fed actions, both under Bernanke and before his chairmanship, to offer more clarity about what the central bank is trying to achieve and what economic conditions it expects. Just this year, Bernanke began conducting quarterly news conferences such as the one Wednesday.
Fed leaders are united on the broad concept of communicating more clearly about their intentions. At their September gathering, according to minutes of the meeting released by the Fed, “most participants indicated that they favored taking steps to increase further the transparency of monetary policy, including providing more information about the Committee’s longer-run policy objectives and about the factors that influence the Committee’s policy decisions.”
But it’s easier to agree on that overarching strategy than it is to name specific targets.
One modest step, for example, would be to announce not just forecasts for the economy, but also forecasts for Fed policy over the years ahead. For instance, if those indicated that the central bank expected to keep its policy of near-zero interest rates in place for three more years, it might help keep longer-term interest rates lower, too. Already, the central bank has dabbled in that approach, through a decision in August that indicated policymakers expect low rates to remain in place through the summer of 2013.
In a more aggressive possibility, Charles Evans, president of the Chicago Fed, has proposed that the central bank name specific levels of unemployment and inflation that would cause the Fed to back away from policies seeking ultra-low interest rates. For example, he has suggested that the Fed pledge to keep those low rates in place until either unemployment falls below 7 percent or inflation rises beyond 3 percent.
“The idea of putting in more explicit targets is challenging,” said Michelle Meyer, a senior economist at Bank of America-Merrill Lynch. “I think ultimately they’re moving that direction. But they’d have to come up with an agreement of what appropriate targets should be. And once they figure out what they want to target, they have to agree on how to get there.”
But many members of the Fed policy committee, concerned about endangering the central bank’s reputation as an inflation-fighter in the longer term, chafe at anything that implies they would accept inflation as high as 3 percent when they have said they are targeting inflation below 2 percent.
“Among the more aggressive communication policy options, the so-called Evans plan is likely the leading contender,” Michael Feroli, chief North American economist at J.P. Morgan Chase, said in a report. “While we favor this plan, and believe it has important support on the Committee, this week may be too soon to expect this plan being implemented.”
In an even more dramatic step that has been advocated by some economists outside the Fed, called nominal GDP targeting, policymakers would set a goal for a certain amount of economic activity, measured in dollars, and set policies to try to reach that goal.
But that goal would be reached through a combination of “real” economic growth and inflation, meaning that it might imply prices rising much faster than the 2 percent or so level that the central bank targets.
There have been no signs from Fed insiders that they are prepared to accept the potentially high inflation that could result from such a strategy, and they generally prefer to move gradually in changing their communications strategies.