Many of my fellow travelers in the quest for easier monetary policy have argued for more aggressive conditional Fed analysis. Things like saying we are going to bring the US back to trend NGDP or that we are going to keep printing until unemployment is at 5%, etc.
Though I liked the idea of price level targeting I have moved away from it, in recent months. I think its fine for the Fed to keep and NGDP or price level target in its back pocket but I don’t think the communication should operate that way.
I think in times like these the communication should focus on the Federal Funds rate and its time path. I think the Fed should do its best to forecast the optimal time path of the Fed Funds rate, communicate that to market participants and then stick to it.
Over the last year or so I have be extremely underwhelmed by the operational sophistication of Fed watchers and market participants in general. I am not sure what to chalk this up to. It could be pure cognitive limitations, which is Fed speak for – these guys are just not as smart as I thought. Though, I am of course, reluctant to accept that explanation.
It could be that conditional policy is confusing to congressional leaders who ultimately have the power to influence the composition of the FOMC. Market participants then accurately read that congressional confusion will lead to policy inconsistency. That is, congress will stop the Fed from doing what it promised because congress doesn’t understand the benefits.
In any case, the lack of a coherent explanation shouldn’t stop us from accepting what appear to be the facts of the matter: the more transparent and sophisticated Fed talk is, the less effective it seems to be.
4 comments
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Tuesday ~ August 30th, 2011 at 9:38 pm
Curt Doolittle
Karl,
Just deal with the fact that monetary expansion is simply politically unacceptable and industrial expansion is not. It’s not unacceptable for NOW. It’s unacceptable FOREVER. The public has determined that the external costs of expansionary money are higher than they want to pay.
I can’t understand why this is incomprehensible.
It’s cheaper, and politically acceptable to bypass the credit system, and inspire people to spend by agreeing with them then disagreeing with them. Expand our industries, not our government or our credit system.
The fact that expansionist industrial policy would require more work for economists should be a net positive.
the fact that it would discredit expansionist monetary policy of course, would be a net negative for SOME economists. 
But for those on the opposite methodological side from you, it would be a net benefit. 
Curt
Tuesday ~ August 30th, 2011 at 10:41 pm
Curt Doolittle
…agreeing THAN disagreeing…
Tuesday ~ August 30th, 2011 at 10:26 pm
Marcus Nunes
Karl
Greenspan´s record indicates that he was very effective – forget what many have said about him after he left. And he was the opposit of “transparent”!
Thursday ~ September 1st, 2011 at 1:51 pm
john Chew
How can printing green printed paper generate wealth? Absurd.
Eliminate our centrally controlled cartelized banking system and the Fed.
How to foster growth and eliminate booms and busts–100% reserved banking with asset and liability matching, management liability for bad loans, free market money and the rule of law.