Wednesday, November 14, 2007

"If You Haven't Thrown Out Your Greenspan Decoder Ring by Now, You Should"

It looks like the Fed is trying to be more transparent by publishing forecasts four times a year instead of two, pushing the forecast out a year, looking at the inflation rate instead of core inflation, etc.

I think all these moves are a tremendous improvement. Someone is finally admitting that maybe, just maybe, the public can handle more complex economic news. We are not as dumb as the people in Washington like to think. Thanks to the internet the discussions about the economy are looking less like a small barber shop discussion and more like a raucous discussion amongst students in a cafeteria (or dorm room). That is good, no one, and I mean no one, has a monopoly on good ideas, good interpretations, good points of view, good forecasts, etc. (that is why I like to read the comments). Text in bold is my emphasis. From Market Watch:

The Federal Open Market Committee announced Wednesday that it's taking a series of steps aimed at giving the public a greater understanding of why it makes the interest-rate decisions it does.

Fed watchers immediately welcomed the new plan and said it marked the central bank turning a corner regarding openness.

"If you haven't thrown out your Greenspan decoder ring by now, you should," said Ethan Harris, chief economist at Lehman Brothers Holding. Former Federal Reserve chief Alan Greenspan took considerable pride in his use of convoluted language to describe the outlook for the economy and interest rates.

Harris said Greenspan's opaqueness was a relic of an earlier era when central bankers cloaked the reasoning behind their policy choices.

"To get support in the long run, the Fed has to be believed and trusted by the public. They shouldn't sound like they are magicians or throwing obscure messages out there. So I think this is a big and important step in the process of more transparency," Harris said in an interview on Bloomberg Television.

In a statement released to accompany a speech on communications issues by Fed Chairman Ben Bernanke, the FOMC -- charged with formulating U.S. monetary policy -- said it would provide more-timely information about the evolving outlook by releasing its economic projections four times each year, rather than twice as done previously.

The first expanded set of projections will be released on Nov. 20, together with the minutes of the FOMC's Oct. 30-31 policy meeting.

In his speech, Bernanke said the measures "represent an important further step toward greater transparency."

Broadly speaking, Bernanke said, the Fed's communication strategy remains a work in progress.

But the U.S. central bank released some important details of its plans -- measures that are the result of work of a subcommittee, headed by influential Fed vice-chairman Donald Kohn.

The subcommittee had also been examining whether to set a formal inflation target, but this wasn't part of Wednesday's announcement.

Bernanke suggested the idea of a formal inflation target did not fit well with the Fed's legal mandate from Congress to maintain stable prices and low unemployment.

But the subcommittee did take some steps toward a formal target: The FOMC said its new forecasts will include both headline and core inflation, as measured by the index of personal consumption expenditures or PCE.

Bernanke highlighted the importance of headline inflation, suggesting that any future inflation target would likely be based on that measure.

At the moment, the Fed focuses its short-term inflation goal on "core" inflation, a measure that excludes inputs on volatile food and energy prices.

"However, at longer horizons, where monetary policy has the greatest control over inflation, the overall inflation rate is the appropriate gauge of whether inflation is at a rate consistent with price stability," Bernanke said.

Bernanke also said that FOMC members will continue to make independent forecasts using their own economic teams. The FOMC will publish a chart showing the distribution of each member's projections and how the distribution has shifted.

Accompanying the projections will be a narrative that discusses risk factors to the outlook.
In addition, the horizon of the projections will be extended to three years from two. The forecasts will include projections for growth of real domestic product, the unemployment rate, and headline and core PCE inflation. These will be released in February, May, July and November.

The FOMC dropped its forecast for nominal gross domestic product, which tracks growth that hasn't been adjusted for inflation.

Bernanke stressed that the conduct of the nation's monetary policy would not change as a result of the increased transparency.

In his remarks, Bernanke joked that the only forecast that was certain was that the Fed forecasts would miss the mark more times than not.

"The only economic forecast in which I have complete confidence is that the economy will not evolve along the precise path implied by our projections," Bernanke said.

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