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.