Free to “speak-out”!

It is encouraging that Obama may soon have to fill up to 5 slots in the Board of Governors of the Federal Reserve. Maybe it´s expecting too much that he´ll think that´s a very important thing to happen at times like the present. He´s already ‘failed’ in a previous instance when he had 3 slots to fill, leaving them open for a long time and even failing to get an appointee approved!

The low quality of some recent Fed Governors is glaring. Take, for example, Kevin Warsh who served between 2006 and 2011. He´s out today in the WSJ critiquing the so called Fed easy policy:

In the coming weeks and months, financial-market participants will try to gauge whether the change in personnel at the Fed means a change in policy. In particular, they will seek to divine whether Ms. Yellen’s views on quantitative easing will lead to still more asset purchases and a longer period of near-zero interest rates.

This line of inquiry is understandable, but the fate of monetary policy and the economy is about much more. The critical issues go to the very remit of the Fed, the efficacy of its tools, its rightful place in government, and its role in the global economy. Allow me to highlight—and then question—some of the prevailing wisdom at the basis of current Fed policy:

All through the difficult times in 2008-09-10 and early 2011, Mr. Warsh not once disputed FOMC decisions by casting a dissenting vote (maybe in 2010 he used Thomas Hoenig, who dissented in all meetings, as proxy).

He goes on:

Recently, the Fed has elevated forward guidance as a means of persuading investors that it will indeed keep interest rates exceptionally low even after QE. Forward guidance is intended to explain how the central bank will react to incoming data. Fed projections for example, may show below-target inflation and a residual output gap justifying very low interest rates several years from now. But words are not equal to concrete policy action. And the Fed hasn’t received many awards for prescience in recent years.

It sure hasn´t, but who has? So attaching “forward guidance” to instruments is a bad communications strategy. But all is not lost. Some may have a suspicion of what the real  problem is:

Forward guidance, this new “communications standard” is examined in depth by a (downloadable) new e-book. I think the book editor, Wouter den Haan puts the finger on the real problem when he says:

Forward guidance shares the basic economic logic that links today’s decisions to future expectations, but it differs in its subject. Forward guidance focuses on the instruments of monetary policy rather than the targets of monetary policy.

Inflation as a target is not only discredited, it is dead. It´s time for a new target. NGDP-LT anyone?

2 thoughts on “Free to “speak-out”!

  1. I found an article about his resignation from 2011 here: http://www.bloomberg.com/news/2011-02-10/fed-governor-kevin-warsh-resigns-bernanke-adviser-had-questioned-stimulus.html

    Here’s a snippet:
    “Warsh staked out an anti-inflation stance on monetary policy in September 2009, when he published a Wall Street Journal op-ed and gave a speech saying the Fed may need to raise interest rates with “greater force” than it has in the past. In June, he said any decision to expand the $2.3 trillion balance sheet must be subject to “strict scrutiny.”
    “When non-traditional tools are needed to loosen policy and markets are functioning more or less normally — even with output and employment below trend — the risk-reward ratio for policy action is decidedly less favorable,” Warsh said in the speech in New York. “As a result, we cannot and should not be as aggressive as conventional policy rules — cultivated in more benign environments — might judge appropriate.”

  2. Pingback: The low quality of some Fed Governors - The Corner The Corner

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