The Fed's Bright Idea
Tuesday, March 28, 2006
Federal Reserve officials will conclude their policymaking meeting today by carrying on a practice that former chairman Alan Greenspan began as a radical innovation 12 years ago. They will tell the world what they have decided to do with short-term interest rates.
And if the Fed's new chairman, Ben S. Bernanke, has his way, central bank officials also will agree today to explore several possible ways to publicly communicate much more in the future about how they view the economy, the inflationary risks and the likely path of interest rates.
"Under Chairman Greenspan, [Fed] policy has become increasingly transparent to the public and the financial markets, a trend that I strongly support," Bernanke told Congress at his confirmation hearing in November. "I expect going forward to look for other opportunities to increase the transparency of the Federal Reserve."
No TV cameras at Fed policymaking meetings, Bernanke assured lawmakers. Wouldn't want to get carried away.
But the options Bernanke and his colleagues have floated include several practices employed by central banks in other countries. They include:
· Writing lengthier statements after policymaking meetings to explain their actions. Fed officials' last statement, released after their Jan. 31 session, included five sentences on their view of the economy and expectations for interest rates. In comparison, New Zealand's central bank released a 40-page document of analysis, data, discussion and forecasts after its March 9 meeting.
· Providing more descriptive minutes of their meetings. The minutes now are highly stylized summaries, former Fed officials say.
· Publishing more frequent economic forecasts by Fed policymakers, who now issue them twice a year.
· Holding news conferences after Fed meetings.
· Setting a long-term, numerical target for inflation. The Fed, by law, seeks "price stability," which generally translates as low inflation but is not specifically defined. Bernanke has proposed that the Fed say it will try to keep consumer price increases, excluding those for food and energy, within a range of 1 to 2 percent a year over a period of years.
The Fed's top policymaking group, the Federal Open Market Committee, is unlikely to adopt such major changes at its meeting today -- Bernanke's first as chairman. In the past, Greenspan assigned small working groups of FOMC officials the job of analyzing options and making recommendations for changes in Fed communications practices. Bernanke could do the same today.
Fed officials have resisted these proposals in the past, with several arguing that their current communications policy is working just fine.