Minutes released yesterday of the Federal Reserve’s December meeting reveal that the central bank intends to take some new steps to enhance transparency by publishing more detailed forecasts of the Open Market Committee members’ views of the outlook. Specifically, starting in January the Fed’s quarterly Summary of Economic Projections will take into account the fact that a guess about the short-term future of the economy is in part a guess about the short-term policy outlook by ensuring that the SEP includes “information about participants’ projections of the appropriate level of the target federal funds rate” over various time horizons. It will also “report participants’ current projections of the likely timing of the first increase in the target rate given their projections of future economic conditions” and will feature an accompanying narrative to “describe the key factors underlying those assessments.”
This, to me, is a slightly strange idea. The problem is that in the wake of the crash of 2007, a sharp recession, a variety of unorthodox measures, and a prolonged employment slump, the Federal Reserve’s old strategy for communicating what it’s doing and coordinating expectations lacks clarity. The Fed, wisely, has been trying to take steps to change this and provide more clarity. But what they’re proposing to do here seems to me to bring extra information without necessarily bringing clarity. The virtue of something like Chicago Fed President Charles Evans’ idea is that it takes an uncertain world and tries to bring more planning guidance to it. He says either inflation will be elevated for a while or else we’ll be experiencing rapid real growth. A nominal GDP level target in effect accomplishes the same thing. The message in both cases is that either way smart people will be rebalancing away from low-yield safe liquid assets into either longer-term investments or consumptions of real goods and services. I’m not sure what the message of these new-format SEP’s is going to be.