There´s much I feel is quite wrong in this Kocherlakota speech (although I´m sure Steve Williamson would vehemently “applaud”). But I´ll concentrate on the last part – “Going forward”.
After mentioning the Fed´s success in “meeting its price stability mandate over the past four years and that the Fed´s actions have helped keep unemployment from rising higher” (this last “accomplishment” is a beauty), and that the Fed does have tools remaining bla bla bla.., Kocherlakota says:
However, the FOMC should do more than simply decide at each meeting whether or not to buy more assets or to keep interest rates low for longer. Any current decision is based on the FOMC’s forecast of the future, and no forecast can be perfect. The Committee should provide a public contingency plan—that is, provide clear guidance on how it will respond to a variety of relevant scenarios. For example, the Committee recently projected that in 2011, core inflation will be 1.9 percent and that it will fall back in 2012 and 2013 to around 1.7 percent. Suppose hypothetically that core inflation, and the outlook for core inflation, has risen to 3 percent by the end of 2013, while unemployment has fallen to between 8 percent and 8.5 percent. A public contingency plan would allow the public to know what the Committee intends to do in that eventuality.
Sounds pretty complicated to me. Much simpler to state a specific target, say a NGDP level target, and strive to keep the economy evolving as close to it as possible. If for any reason it drops below or climbs above, everyone knows what the Fed´s action is going to be: put the economy back on the target path.
He then goes on to say:
I believe that public contingency planning will have many benefits. Let me mention two. First, in recent statements and speeches, I have described why the FOMC actions in August and September seemed inconsistent with the evolution of the macroeconomic data in 2011. This kind of inconsistency is much less likely to occur once the FOMC has formulated an explicit public contingency plan. Second, I’ve heard from businesses that policy uncertainty is curbing their incentive to hire or invest. Similarly, I’ve heard from consumers that policy uncertainty is curbing their incentive to spend. A public FOMC contingency plan can help reduce the level of policy uncertainty being created by the Fed.
I can´t figure out how “contingency planning” will reduce “policy uncertainty”. This doubt I expressed becomes clear when he says:
No contingency plan can ever be definitive. Inevitably, the FOMC will learn things that it did not expect to learn. And so there may be conditions that force the FOMC to deviate from a chosen plan. However, having a public plan, and couching its decisions against the backdrop of that plan, will enhance Federal Reserve transparency, credibility, accountability and consistency.
As soon as you say that you are potentially expanding the “uncertainty space”, so it would not be of much help in reducing the “policy uncertainty that´s curbing incentives to spend and hire”. Importantly, FOMC actions in August and September that “seemed inconsistent with the evolution of the macroeconomic data in 2011” to Kocherlakota, may have seemed consistent (or inconsistent in an opposite sense) to other FOMC members. Again, “policy uncertainty wouldn´t be much reduced”.
Much easier, again, to state an explicit TARGET (hopefully not for inflation or unemployment) and pursue it “tenaciously”. And always remember that an NGDPT level target was quite successfully, even if unwittingly, pursued by Greenspan for 20 years. When the Bernanke Fed, full of “inflation hawks” “abandoned” it, the result was “depressive”.
Marcus, this is a good post.
If the Fed had a stated target then contingency plans would be irrelevant: any new macroeconomic information would simply be used to update the time-path of interest rates/QE so as to keep expected NGDP on target. No complicated array of plans required. The public would already know what the contingency plan is: if the economy is running above expected NGDP, tighten; if below, loosen.
You have to “complicate” the problem in order to apply Dynamic Programing.
I can’t say what is worse–Kockerlakota’s complicated language and mistakes, or Fisher’s obvious duncery.
Good post. I had noticed that bit too, about conditional commitments. It’s like watching an idiot savant take baby steps towards the idea that a target might be helpful.
Nick – “idiot savant”? Ouch!
So…we’re going to make a plan, tell people the plan, and while we’re telling people the plan we’ll also tell people we might not follow the plan in the event.
The only way to make that work is to have a powerful figure like Alan Greenspan running the Fed — and if you have a powerful figure like Alan Greenspan running the Fed, you don’t need publicly announced contingency plans because everyone figures Alan Greenspan will know what to do.
I speak as a person who lived through the Greenspan era without knowing – without feeling a **need** to know – much about macroeconomics.
Today I feel that “knowing something” about macroeconomics is a survival skill practically on the level of knowing how to administer the Heimlich maneuver to strangers in restaurants.
(Don’t know where that came from — !)
I think the Fed should conduct monetary policy in such a fashion that the vast majority of citizens believe macroeconomics is Not Something I Need To Know.
“knowing how to administer the Heimlich maneuver to strangers in restaurants.”
Make that: “knowing how to administer the Heimlich maneuver to CHOKING strangers in restaurants.”
That was Greenspan´s talent: He conducted “appropriate MP”, and people just went (most of the time) about their business. Now everyone (or almost) feel they have to understand about MP, FP, TP (that´s trade policy), China´s “currency speculation”, how US jobs are going abroad, etc, etc