Designing a horse (and monetary policy) by committee

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Are uncoordinated messages from the Fed causing confusion? 3 views:

The charge

Kenneth Rogoff: The Fed’s Communication Breakdown

Nothing describes the United States Federal Reserve’s current communication policy better than the old saying that a camel is a horse designed by committee. Various members of the Fed’s policy-setting Federal Open Markets Committee (FOMC) have called the decision to keep the base rate unchanged “data-dependent.” That sounds helpful until you realize that each of them seems to have a different interpretation of “data-dependent,” to the point that its meaning seems to be “gut personal instinct.”

In other words, the Fed’s communication strategy is a mess, and cleaning it up is far more important than the exact timing of the FOMC’s decision to exit near-zero interest rates. After all, even after the Fed does finally make the “gigantic” leap from an effective federal funds rate of 0.13% (where it is now) to 0.25% (where is likely headed soon), the market will still want to know what the strategy is after that. And I fear that we will continue to have no idea.

Pedro Nicolaci da Costa: The Fed Needs to Get Its Story Straight

[S]hortly after their September 17 decision to leave rates on hold, policymakers were again out in full force reassuring investors that borrowing costs would indeed be going up before the end of the year. "Given the progress we've made and continue to make on our goals, I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year," said John Williams, president of the San Francisco Fed, just two days after the meeting. As Adam Posen, president of the Peterson Institute for International Economics, tweeted in response to a packed line up of Fed speakers: "This is no way to run a railroad. All FOMC voters should speak but should coordinate, not fight for oxygen."

... the Fed board's institutional inertia means the more powerful board governors often speak less frequently and less loudly than the less influential but more vocal presidents of regional Fed banks. This exaggerates the impression of disagreement within the committee, arguably diluting the effect of new stimulus policies not long after they are unveiled.

The defense

Bernanke's blog - Fed communication: "Is there a case ... to change the institutional structure of the Fed to limit public pronouncements on monetary policy? I don’t think so. The diversity of opinion coming from the Fed serves some important purposes, over and above communication to markets... Public speeches are a forum for elaborating and providing evidence for their positions. Think of policymakers’ speeches as a continuation of the FOMC debate in other venues. ... [T]he open airing of policymakers’ opinions and analysis actively engages the public in debates about critical issues."

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