Is Fed Ambiguity a Virtue?
Bernanke came to the Fed as an advocate of greater transparency, arguing for more public statements, news conferences and forecasts. I suspect he may be losing a bit of his enthusiasm for openness as he discovers just how closely (and often foolishly) the markets hang on a Fed chairman's words. The danger (as his comment to Bartiromo suggested) is that the markets adjust so quickly to what they think the Fed is doing that they leave the chairman little flexibility. Once the traders are convinced he's doing "x," he may have to do "2x" to achieve the desired result. Thus the value of Greenspan's public mumble -- it created just enough ambiguity to give him room to maneuver.Does this analysis make sense in standard macroeconomic models? Should the Fed create extraneous uncertainty by having a mumbling Fed chair in order to increase its ability to influence the economy? Does a transparent Fed need to do more to achieve a given result than an opaque one? I think most monetary economists would answer these questions No, No, and No.
There is no point in creating extraneous uncertainty by purposeful lack of clarity. However, there is intrinsic uncertainty that Fed officials have to deal with and have been trying to explain. If there is now uncertainty about what the Fed is going to do, it is largely because Fed officials themselves don't know what they are going to do.
Three facts are clear about the current economic situation:
- The economy is close to estimates of the natural rate.
- Estimates of the natural rate are very imprecise, so we shouldn't take much solace in fact 1.
- A lot of monetary tightening has already occurred, and the effects on the economy may not have been fully felt yet.
Ambiguity is sometimes a fact of life in monetary policymaking. But I can't see why lack of clarity in itself is a virtue, as Ignatius seems to suggest.