Newly-released minutes of the Federal Open Market Committee’s March 18-19 meeting (as well as a bonus set of minutes from a newly-disclosed pre-meeting video conference call on March 4) have predictably drawn the attention of reporters, economists and market participants keen on deciphering the future path of monetary policy. Innumerable reports have focused on a passage in the minutes in which Federal Reserve officials seem to worry that their individual predictions for the timing and size of interest rate hikes might be misread to convey a more hawkish FOMC than expected. The economic implications of misinterpreting these predictions (or “dots” as Fed Chair Janet Yellen calls them) are important. But let’s also consider the political implications of the FOMC’s 2012 decision to publish the dots.
Here is a key passage from the minutes:
A number of participants noted the overall upward shift since December in participants’ projections of the federal funds rate included in the March (projections), with some expressing concern that this component of the (projections) could be misconstrued as indicating a move by the Committee to a less accommodative reaction function. However, several participants noted that the increase in the median projection overstated the shift in the projections.
That concern seems to be what motivated Yellen at her post-meeting news conference in March to de-emphasize the “dots”: “I would simply warn you that these dots are going to move up and down over time a little bit this way or that. I really don’t think it’s appropriate to read very much into it….The FOMC statement is the device that the Committee as a policymaking group uses to express its opinions.”
Why is this dot-dissing importantly politically?
The key issue here is not simply whether the public can interpret dot trends correctly. Yellen is also distinguishing between the “Committee” and the broader FOMC. The committee’s statement of course reflects the views of voting members of the FOMC (currently four governors and five reserve bank presidents). The “dots” represent the views of both voting and non-voting FOMC members, which includes a handful of more hawkish, non-voting bank presidents.
Yellen likely wants to de-emphasize the dots not only because they seem to convey a more hawkish FOMC, but because they muddy the committee’s ability to communicate the future policy path. This concern emerges in a subsequent passage of the minutes that didn’t attract much attention today.
In the minutes, the FOMC also debated whether the March statement should include information about the likely future path of interest rates after an initial rate hike. A couple of members (presumably more hawkish ones) preferred to wait until after a rate hike; the prevailing position preferred to indicate now that economic conditions might warrant keeping the target funds rate below normal even after the hike. The minutes then record that “It was also noted that the postmeeting statements, rather than the SEP [aka the dots], provide the public with information on the Committee’s monetary policy decisions and that it was therefore appropriate for the postmeeting statement to convey the Committee’s position on the likely future behavior of the federal funds rate.”
The political element here is the difficulty that Yellen (like her predecessor Benjamin S. Bernanke) faces in conveying Fed policy choices in an era of increased transparency. Fed officials understand the economic value (perhaps even the political value) of bolstering transparency of the Fed’s monetary policy choices. That’s why Bernanke (and Yellen as chair of the Fed’s communications subcommittee) pushed the Fed to release the projections in the first place.
However, as the Fed continues to let up on the accelerator, release of the dots seems to be complicating the Fed’s ability to communicate the committee’s policy stance. The FOMC could stop publishing members’ projections, but making the Fed less transparent would likely be politically unpalatable.
Alternatively, the FOMC could match names to dots to distinguish between voting and non-voting members, although such a degree of transparency might be a bridge too far for the FOMC. To be sure, the Fed’s peculiar structure has long complicated monetary policy making by committee. The confusion made by just a few dots simply adds to the governance challenges Yellen confronts in leading the Fed’s exit from its unconventional policies.
More “pre-meeting meetings” no doubt ahead.