Jim Hamilton points to a slide from Charles Evan’s presentation that does exactly what I hoped
It shows how price-level targeting would map on to the usual inflation rate speak that Bankers and CFOs are used to. It shows in the blue bars what market participants would expect. A gradual return to the target.
It shows in red bars what “price level targeting means for them” that is an inflation rate that temporarily overshoots before settling back down to the target.
This is the kind of thing that people can understand and it helps clear up what’s going on. Its not some wild new regime that they cannot predict. It is a temporary deviation that leaves the long-run target intact. I especially like how the two bars line up in 2014, giving a clear expectation of when the traditional world and when this new strategy will converge.
Of course, any policy explanation – and I am assuming the official channel for something this complex has to be the Fed minutes – needs to include a “revised as data becomes available” clause and regular updates on where we are in the process.
I also like how the top two lines makes it clear why this strategy is appropriate. We are just returning to what would have been the case if we had never missed the target in the first place.
These type of communications are great and hopefully will allow market participants to accurately understand the Fed is trying to do here. I am very interested to see how market participants respond on Monday.
5 comments
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Sunday ~ October 17th, 2010 at 4:10 pm
jazzbumpa
Targeting is one thing. Hitting the target another. Evidently expectations don’t necessarily make it so. Hamilton also says:
Even in the best of times, the inflation rate will differ substantially from forecasts and policy objectives. And when the inevitable miss comes, one could imagine that the public would be less rather than more assured as a result of the Fed’s specificity in communication.
What are we to make of this?
JzB
Sunday ~ October 17th, 2010 at 5:47 pm
Johnnie Linn
We will have a more rapid return to, and a possible overshoot of, the long run target rate than you predict because some fear factor issues will be resolved. We will know what the new tax structure is, the political climate, etc.
I have bothered you about this enough already, so you can mark me down as a charter member of the “Four Month Club”, meaning that I won’t return to this blog to comment on this particular issue (though I might take a stab at other issues) until four months from now, i.e., February 17.
See you on February 17!
Sunday ~ October 17th, 2010 at 5:48 pm
Karl Smith
Jim is correct. This is why I insist on saying
“The FOMC anticipates that the price-level will be hit by mid 2014 but will be monitoring data as it becomes available and will update the forecast accordingly”
This tell market analysts exactly what they should be looking at and exactly what the Fed wants to achieve. They will advise their respective CFOs on what to expect.
One thing I put a lot of emphasis on is making sure that private decision makers, ie CFOs, Bank Presidents, etc know exactly whats going on and what it means for them.
The Fed should be careful not to over commit but be very explicit on how it is approaching the problem. This, in my mind, is the path of greatest clarity.
Sunday ~ October 17th, 2010 at 8:10 pm
jazzbumpa
Mid 2014 is 45 months away. Will we know more when Johnnie comes back (unarmed, I hope) than we do now?
Cheers!
JzB
Monday ~ October 18th, 2010 at 11:50 am
MooPoint
What’s the difference between inflation and stealing again? I’ve always found it odd that so many people can be in favor of destroying the purchasing power of people’s savings and income.