Tuesday, March 28, 2006

Federal Reserve Communication

Monetary policy under the new Fed Chairman Ben Bernanke will probably not be very different than it was under Alan Greenspan, but the way the Fed communicates about its policy may change substantially over time. The Washington Post has a good article today on the topic by Nell Henderson. Here is an excerpt:

The Fed's Bright Idea

Federal Reserve officials will conclude their policymaking meeting today by carrying on a practice that former chairman Alan Greenspan began as a radical innovation 12 years ago. They will tell the world what they have decided to do with short-term interest rates.

And if the Fed's new chairman, Ben S. Bernanke, has his way, central bank officials also will agree today to explore several possible ways to publicly communicate much more in the future about how they view the economy, the inflationary risks and the likely path of interest rates.

"Under Chairman Greenspan, [Fed] policy has become increasingly transparent to the public and the financial markets, a trend that I strongly support," Bernanke told Congress at his confirmation hearing in November. "I expect going forward to look for other opportunities to increase the transparency of the Federal Reserve."...

"Being opaque came naturally to [Greenspan], that's just the way he is," [economist Alan] Blinder said in a recent interview. "Being more open and clear comes naturally to Ben, and I expect we'll see that continue."

To Blinder, for example, the FOMC's last statement reflected Greenspan's style -- cryptic, coded and generally impenetrable to a normal person. In contrast, he predicted one of the first acts of the Bernanke Fed will be to "adopt English as its official language. That itself would be a positive step."

Question for ec 10 students: What is the right amount of openness for policymakers, such as those at the Fed? Neither extreme (complete secrecy or webcams at every meeting) seems desirable. How do you strike the right balance?