This commentary was originally published in Forbes. The views expressed are the author’s own.
The new Fed chair, Kevin Warsh, has made it clear that he would like to make significant changes to the Fed’s monetary policy communication. He has argued that excessive communication isn’t helpful to the public and may constrain monetary policy decisions. He has been particularly critical of the Fed’s projections of the policy interest rate (the “dot plot”), arguing that policy makers “hold on to those forecasts longer than they should.”
At his confirmation hearing, Warsh suggested that he could hold fewer press conferences, indicating that press conferences should only be held if there is “important news” to convey. He has also suggested that the publication of meeting transcripts should be pared back because publication, even with a lag, may lead policymakers to hold back in policy discussions for fear of being proved wrong later.
Why Scaling Back Communication Matters
While some of the concerns about communication are not new, and improvements in communication would be welcome, a broad scaling back of Fed communication would likely lead to worse economic and financial outcomes and reduced Fed accountability.
The increases in communication put in place in recent decades have allowed the public to better understand the Fed’s objectives, the economic situation, and the Fed’s likely policy decisions. That increased understanding helps make policy more effective. For example, communicating clearly about the Fed’s inflation objective and the actions the Fed will take to support it helps to anchor inflation expectations near the Fed’s target of 2%. Because wage and price-setting decisions of businesses and households reflect those expectations, better-anchored expectations help keep actual inflation near target.
In addition, greater clarity regarding the Fed’s objectives and judgements can help financial markets understand the Fed’s policy reactions, allowing market participants to build in appropriate policy expectations as the economy evolves, reducing financial market volatility and doing some of the policymakers’ work for them.
Transparency Also Supports Accountability
The move to increased transparency in recent decades also aimed to increase Fed accountability. The Fed has been delegated important responsibilities by Congress, and it needs to be accountable for how it discharges those responsibilities.
But accountability requires regular communication regarding how policymakers assess the incoming data and its implications for the economic outlook, as well as the judgements that contribute to their monetary policy decisions. Without such information, Congress and the public cannot be sure whether economic outcomes reflect skill or luck on the part of the Fed.
Forecasts Are Essential To Understanding Policy
Because monetary policy works with a lag, both public understanding of policy actions and public accountability for those actions require information on the Committee’s assessment of the economic outlook and the policies needed to foster the Fed’s goals of maximum employment and stable prices. Commonly, policymakers need to trade off deviations from the two objectives. Thus, the Fed cannot explain its policy decisions without communicating its assessments of the likely size and duration of such deviations—that is, communicating its forecasts for the economy.
Because policy is made by a committee, it is useful for the Fed to communicate the views of all policymakers. The Summary of Economic Projections and speeches by policymakers, while potentially showing a wide range of rapidly changing views, are critical to allowing the public to understand the Fed’s policy decisions.
What Reduced Communication Could Mean
If implemented broadly, the reductions in Fed communication suggested by Chair Warsh could lead to a much less transparent Fed. One result is likely to be less effective monetary policy, as the public will be less clear on how the Fed would use its policy tools to foster its objectives.
Another likely result is increased financial market volatility, as less information from the Fed leads to more surprises for investors. Of course, such surprises are unavoidable when the outlook for the economy changes unexpectedly, but increasing market volatility when it is not necessary seems counterproductive.
Finally, less comprehensive communication could reduce Fed accountability by making it more difficult for outsiders—including members of Congress—to understand and evaluate Fed policy decisions. The result is likely to be an increase, rather than a decrease, in criticism of the Fed. Moreover, it isn’t clear why Congress, which in the past has pressed the Fed for greater transparency, should be content with a significant reduction now.
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