The new tell-all Fed

That is the new NYT piece by my long-time friend and associate Randall Kroszner, excerpt:

Under Mr. Bernanke, lips have loosened rapidly with quarterly news conferences, forecasts by F.O.M.C. members of key economic indicators, countless testimonies before Congress and, now, the explicit adoption of a 2 percent inflation goal.

The advantage of such glasnost is that it can give the Fed greater bang for its buck. Buying more government bonds may bring down interest rates today, but getting people to believe that the Fed will continue such “accommodative” policies adds to the potency of its actions in two ways: expectations of future borrowing costs stay low, and uncertainty about future monetary policy (and hence, future borrowing costs) declines. Such knowledge lets firms be more confident about investing and hiring, and gives homeowners and potential home buyers more faith that mortgages will stay affordable, providing support for the housing market.


We will manipulate the market and control prices until we can't.

Translated, Well, Japan managed to do it for a quarter of a century, so we should be able to do it at least that long. That should cover most of us, give us time to finish our career and retire in comfort. As for the kids, well.

Can we call this shift "Connotative Easing"?

Does it risk cheap statements driving out good ones – rhetorical Greshamization?

Nice one.

Talk is (usually) cheap.

This is pure, unadulterated bull.
Look over the minutes from any of the really important meetings and you still see so much redaction its laughable.

Good piece, but why bound Bernanke's openness with a narrative about "progress" when Kroszner understands the change to "transparency" is contingent on the transmission mechanism shifting towards expectations. In the days of higher NGDP growth expectations the main mechanism was interest rates, which shifts the Fed to quietism to avoid accidentally slipping into expectational monetary police.

Without reading the article (Tyler's summary is apt enough for me): first, I never understood how the bicoastal bubbles of the US housing market, said to be California-Nevada-Arizona and Florida chiefly (though I hear a leading #5 would be Michigan, if I heard or remember correctly), were permitted to inflate to the magnitudes at which they burst. Were state governments taking kickbacks from maniacal builders and real estate developers: no one tracked the volume of the issuance of building permits, no one tallied the populations that such rates of construction anticipated, no one noticed that the market volume in each locale was well on the way to getting WAYYYYY out in front of demand? All those years from, say, 1990 through today, but especially in the decade the building boom hit (which commenced when: after the Clinton-Rubin deregulatory effort took hold, with help from Gramm-Rudman-Hollings, was it, 1998f.? My interest in economics grows only fitfully, apologies.) How many vacancies and foreclosures in these four or five states remain? (Does Spain offer more attractive options?) Or were state governments only innocently failing to pay due regulatory attention? (Our governators often seem eager to acquire regulatory power prior to their failure to apply it.) Secondly: I recall stories that may yet ring true of ghost neighborhoods, block after street of vacant houses, ostensibly and theoretically open to occupancy, but until Americans take advantage of the Fed's accommodations, et cetera, et cetera, et cetera: at what point can or would mass demolitions commence? Losses only carry for so far. Those houses will just sit there, as long as it takes? As long as it takes?

"Our governators often seem eager to acquire regulatory power prior to their failure to apply it"

The purpose of getting the power is to make people pay you to not use it against them

"were state governments taking kickbacks from maniacal builders and real estate developers: no one tracked the volume of the issuance of building permits"

I don't understand your statement. Prices didn't go up because builders and real estate developers were building 'too' many houses. Prices go up when supply is constrained. The issue was instead on the demand side, where no doc loans and easy money and the expectation of rapidly rising house prices extending into the future created a ridiculous bidding war for housing.

No, but the fact that so many houses were being built should have been a sign that prices should not have been going up. Absent some huge demographic boom (which there wasn't), rapidly increasing supply should not lead to rapidly increasing prices.

Easy to say in hindsight, yes, but I take some solace in the fact that I refused to buy a house in CA in 2006 despite family members urging me to do so.

The reasoning behind this post is a classic example of justifying a conclusion based on the premise, a form of post hoc ergo propter hoc reasoning. If transparency is so good (and presumably obviously good?) then why did we have non-transparency before? As I recall the logic behind Fed obfuscation was that it kept traders guessing, which was a good thing to prevent trends from forming--'irrational exuberance' . Now, it's the opposite, why? Further, why does the Fed redact its minutes even today, if transparency is so good? This is one reason why economists are IMO like soothsayers or those who drive looking in their rear view mirror.

Economists, or maybe only classical economists, tend to believe "whatever is, is best" a little too readily for my liking.

Panglosianism noted, agreed. Also Google this on why sudden, unannounced policy shifts by the Fed may be better than announced changes: policy ineffectiveness proposition ( though perhaps the Fed is making an exception for ZIRP

Further reading on this topic indicates that announced policy changes are more effective than unannounced policy shifts, so PIP is out, and 'transparency' is in. I think unannounced policy is better but can't prove it.

Kroszner makes an important distinction that should not be overlooked:

"Strong arguments can be made for whether or not it’s appropriate for the Fed to continue its extraordinary effort to stimulate the economy by flatlining interest rates, by buying up Treasury bonds and mortgage-backed securities and by flooding the economy with bank reserves — a policy known as quantitative easing."

and then,

"But that said, the fewer surprises and mixed messages in communication there are, the more likely the Fed’s efforts to shore up the American economy will be effective."

Of course, we can question how much certainty is created by policies (plans) that have not yet undergone stress. What happens it inflation gets to 2-2.5% but unemployment does not change much. Does that mean the policy was mistaken and should be dropped?

I enjoyed the article. There is a good case made in monetary theory for the clear transmission of information and policies, but I would argue that there were some messy real world drivers of the greater transparency too. Policy makers are important in this story but the outside world (financial crisis, ZLB, sluggish recovery, Congressional/public pressure, etc.) also plays a role. I did not see the latter mentioned much in the article. The title made me smile...does raise the question of when/if we might hit the TMI threshold.

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