Shadow Open Market Committee Statement on Bernanke’s Press Conference

APRIL 27, 2011

The Shadow Open Market Committee has long advocated increased transparency in the Federal Reserve’s communications with the public. We commend Chairman Bernanke’s willingness to hold a press conference today immediately following the Federal Open Market Committee meeting as a means of advancing understanding of the Committee’s monetary policy decisions.

Fed transparency proceeded historically along three tracks: current policy stance, long run objectives, and deliberative process. For instance, the Fed began in 1994 to announce its current federal funds rate target immediately after each FOMC meeting. In 2007 the FOMC moved toward announcing an explicit longer-run inflation objective by extending its forecast horizon for inflation. Today, the results of the FOMC’s deliberative process are communicated immediately in a policy statement, a few weeks later by minutes, and five years later by a near verbatim transcript. Members of the FOMC make speeches regularly.

Bernanke’s press conference is about better communicating the Fed’s thinking, its deliberations. The reasoning behind the Fed’s monetary policy decisions remains obscure in the wake of the unprecedented expansive monetary, credit, and interest rate policy initiatives undertaken by the Fed recently. The Fed must rebuild the public’s confidence in its commitment and strategy to deliver a non-inflationary recovery from the Great Recession.

The press conference is a step in the right direction. To succeed, however, Chairman Bernanke’s reasoning must flow from a clarification of the Fed’s objectives, its plans for realizing those objectives, and an understanding of the costs of failing to achieve price stability in the past.

Although effective communication is an essential component of monetary policy, communication itself can only clarify and reinforce clearly-stated strategic policy objectives and guidelines for how the Federal Reserve intends to achieve its objectives. Communication cannot substitute for a lack of clarity about objectives or about plans for realizing those objectives.

The Shadow Open Market Committee recommends that the Fed clarify its objectives and guidelines as follows to facilitate communication with the media and the public via the Chairman’s press conferences.

First, the Chairman should inform the public of the explicit numerical working objective for long run inflation that the FOMC uses for internal purposes of policy simulation and deliberation. There is no reason to keep this from the public. It serves as a natural benchmark against which to discuss monetary policy.

Second, the Fed should explicitly justify short run actions to stabilize employment against its commitment to protect the long run purchasing power of money and to maintain low and stable expectations of inflation. The Fed justified QE2 in part saying that the rise in the unemployment rate was largely cyclical in nature, suggesting insufficient demand in the economy. Yet separately the Fed has emphasized the limited ability of monetary policy to generate employment, and recently has acknowledged that the unemployment rate may remain elevated for years. The Fed should explain the channels through which monetary policy generates jobs, in particular, under current circumstances.

Third, the Chairman should clarify how the Fed measures and judges the stability of inflation expectations for the purpose of maintaining low inflation. Recently, measures of inflationary expectations have risen, but the Fed continues to state that those expectations remain well anchored. Clarification is required.

Fourth, the Chairman should clarify the respective roles of core and headline inflation in the Fed’s monetary policy thinking. How can the Fed be confident that rising fuel prices are not the result of excessively easy monetary policy? And how confident is the Fed that its estimates of the impact of the lower US dollar and higher oil and commodity prices on core inflation will be modest, in the global environment that is evolving rapidly and facing heightened inflation pressures?

Fifth, the Chairman has reminded us that the Fed has learned the lessons of the Great Inflation of the 1960s and ‘70s and the stabilization of inflation thereafter. But what were those lessons? Monetary policy that delivers consistently low inflation allows the economy to achieve a lower average unemployment rate over time than otherwise. Inflation episodes begin as temporary, but only remain temporary if the Fed moves decisively to remove momentary accommodation. What convinced Fed Chairman Paul Volcker to stabilize inflation in the early 1980s was his recognition that playing catch up against inflation condemns the Fed to run the economy below potential time and again to maintain a degree of inflation stability.

Sixth, the Chairman should describe the channels by which the current expansive monetary policy purchases of Treasury securities are believed to have stimulated the economic activity. Many recent Fed statements have pointed to positive economic responses of QE2. Have the traditional lags between monetary policy and the economy shortened significantly?

Seventh, the Chairman should clarify the objective of expansive monetary policy– was it to preempt deflation, to deliberately drive inflation above 2 percent, or to reduce the unemployment rate? If the Fed’s earlier rationale for QE2 no longer applies, the Fed should provide its strategy for normalizing monetary policy by draining excess reserves, selling assets, and raising interest rates.


For more information on the Shadow Open Market Committee, go here.

For more information on the members of the SOMC, go here.