FOMC Communication Gets Curiouser And Curiouser

by: Bob McTeer

In my last post on the subject, I referred to the FOMC’s orgy of transparency. It looks like it’s going to be worse than I originally thought. Not only are they going to publish the Fed Funds forecasts of individual members; they apparently plan to do that but not put names with the forecasts. The new sport will probably be for some members to try to “out” themselves in their speeches. Later on some will probably try to hide in the closet.

My point here is that, while I think this is a mistake, I hope it can be used to fuzzy up a previous mistake, which in my view was putting a date on the period of very low interest rates of at least mid-2013. Hopefully, this new exercise can be used a something of a substitute for that one. If we have individual forecasts, what does the collective forecast mean?

I understand that Mr. Bernanke is a master of making meaningful policy with his pronouncements. His mid-2013 commitment will help keep longer term interest rates lower that they might otherwise be. While there may be some value in that, the downsides are greater. By downsides, I refer especially to the loss of flexibility if circumstances change and the prolonging of an already too long period of financial repression. A third downside in my opinion is encouraging people to judge monetary policy solely by interest rates without any focus on growth of the money supply.

The economy remains fragile, but not nearly as fragile as it once was. It could stand giving savers some small relief by allowing interest rates to rise somewhat within the context of general control over the Fed’s balance sheet and growth of the money supply. The impact on savers is always a partial offset to the benefit to borrowers of a low interest rate policy, but this combination has gone on too long. What I’m asking for is not a reversal of the general thrust of monetary policy, but an adjustment in its composition or makeup. That is a tall order, I know, but Mr. Bernanke has a demonstrated ability to fill tall orders. That’s the larger request. My more modest suggestion for this week’s meeting is to use the new communication to take back or blunt some of the previous harmful communication.