By Howard Schneider
AMELIA ISLAND, Florida (Reuters) -A proposal for the U.S. Federal Reserve to release detailed economic forecasts after some of its meetings to anchor the discussion of monetary policy is drawing fire from the heads of its regional banks who worry it will be hard to agree on a common outlook and risks further confusing the public.
Fed Chair Jerome Powell flagged the need for improved communications in remarks to a central bank strategy conference last week, and former Fed Chair Ben Bernanke presented a plan for staff-generated economic reports and forecasts that would be released after policy meetings four times a year.
In his May 16 presentation, Bernanke said releasing a “transparent, complete and comprehensive macro forecast” would help people better understand Fed decisions and what was likely to follow, while highlighting alternative scenarios would give policymakers more flexibility to change course if the outlook changed – such as when inflation veered higher in 2021. It would also bring the Fed in line with what many of its peers are doing.
Atlanta Fed President Raphael Bostic, in comments on Tuesday to reporters at a conference in Florida, called Bernanke’s proposal “thoughtful and provocative,” but questioned the added value of releasing a staff forecast in real time. Staff forecasts are presented internally at the Federal Open Market Committee’s eight policy meetings each year, short descriptions are included in the minutes of each meeting released to the public three weeks later, and the full documentation is published five years later along with meeting transcripts.
If the staff forecast is issued in real time, “would this be seen as … the basis upon which the committee makes decisions? I struggle with that because I don’t think it would,” Bostic said. Among policymakers “there are 19 views, and if we add the staff report, that would be 20.”
“There’s a hunger out there for something more. And the question I’m wrestling with my team is sort of, what’s the way to satisfy that hunger? Is there a way to do it that would not lead to perhaps misleading inferences,” Bostic said.
Others weighed in at a joint appearance with the Atlanta Fed president and at Bernanke’s presentation.
“I’m always open to ideas about how we can be more transparent,” Cleveland Fed President Beth Hammack said. “Practically, getting the committee to agree on one consensus forecast or even a couple of different scenarios is really challenging, and I do worry that just putting out lots more information might not actually guide the public in the right way … It may actually leave them more confused.”
‘NEEDS TO BE SIMPLER’
One aim of more detailed forecasts would be to deflect some attention from the quarterly “dot plot” chart of policymaker interest rate projections, a public communications tool that has become something of an annoyance for policymakers across the Fed system.
A collection of individual submissions by up to 19 policymakers, the quarterly Summary of Economic Projections and rate projections are not aggregated into a shared outlook. Yet financial markets and the public, Fed officials say, still treat each quarterly release as a policy roadmap with undue weight placed on the median of an often wide distribution of numbers.
Analysts complain it also leaves unclear what the Fed is reacting to when the rate outlook changes; whether higher rates, for example, stem from higher expected inflation, different perceptions of risk, or changes in more underlying economic forces.
But Bernanke’s proposal, so far, has largely just revived a battle he fought unsuccessfully when the Fed was revising its policy approach in 2012. A similar idea then was also criticized by regional Fed bank presidents who have their own technical staff, take varying approaches to modeling the economy, and would be cautious in signing off on any new product meant to shape public expectations.
Limiting confusion about the Fed’s plans – making clear the basis of rate decisions and the economic factors that cause them to change – is a central theme of policymaker discussions right now.
Clear communications are considered important to making monetary policy effective by helping markets trade in more informed ways, decreasing volatility around policy decisions, and helping keep broader public expectations in line with the Fed’s 2% inflation target.
The existing approach to policy, adopted in 2020 when concerns about the COVID-19 pandemic and related high unemployment were dominant, is likely in for extensive revision driven by a common theme: Simpler is better.
Changes made to the Fed’s approach five years ago included a promise to use higher inflation to offset periods of lower inflation, to not use a low unemployment rate as a sign in itself of future rises in inflation, and a characterization of maximum employment as a “broad and inclusive” goal.
The phrase was meant as a statement of fact about the benefits of maximum employment, and echoed the 1970s law that added a jobs “mandate” to the Fed’s responsibilities, but was often construed publicly as the central bank delving into issues of economic equity that it could not really resolve.
There’s broad agreement inside and outside the Fed that the current approach is too complex and needs to be pared down.
“A framework should be robust to a broad range of conditions,” Powell said last week, warning, for example, that supply shocks and inflation spikes could become more frequent.
“If the objective is to communicate to the public what the Fed is trying to do, what it’s looking at, then it needs to be simpler,” said Carl Walsh, an economics professor at the University of California, Santa Cruz, who dissected the Fed’s 2020 framework in a paper that urged it to be clearer in its framework that maintaining stable inflation was one of the preconditions for achieving its employment goal.
Officials continue to debate replacement language for the framework, which is likely to be announced in August at the central bank’s annual Jackson Hole symposium in Wyoming.
The discussion of what additional material to provide around the Fed’s policy meetings is a separate debate being carried out in parallel.
Powell last week indicated he wants change, but may face a challenge building consensus over what to do.
“A common observation is the need for clear communications as complex events unfold,” Powell said. “Clear communication is an issue even in relatively placid times.”
(Reporting by Howard Schneider; Editing by Paul Simao)
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