Richard Alford: The Fed’s Orwellian Claims About its Transparency

By Richard Alford, a former New York Fed economist. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

The US mainstream media (MSM) found a lot to like when the FOMC announced that its current highly accommodative monetary policy stance will continue unless certain “threshold levels” for unemployment and inflation are reached. While the MSM was not uniform in its praise, it applauded what it saw as the increased transparency in the design and execution of monetary policy. In comparison, the response of the market and the foreign press was muted, and comments by financial and economic bloggers were mixed. Juxtaposing a Binyamin Appelbaum article in the New York Times (serving as a stand in for MSM), the transcript of the Bernanke press conference, and a working history of monetary policy, it is clear that the enthusiasm of many in the MSM for increased clarity is misplaced. This in turn has less than flattering implications for the MSM, the Fed and its communication strategy.

Applebaum asserts that the current Bernanke FOMC is more transparent than its predecessors:

Over the last two years, Mr. Bernanke and his colleagues have announced a series of changes intended to increase the transparency of the Fed’s decision-making. Some of those moves have also transformed the way those decisions are made…

Several of those changes were tied together by Wednesday’s announcement that the Fed would hold short-term interest rates near zero as long as the unemployment rate remained above 6.5 percent and inflation remained under control.

Appelbaum places great weight on transparency and asserts that the Fed first employed transparency in 2003 with the aim of affecting long-term rates and the economy:

The Fed first experimented with this approach in 2003, when it announced that it would keep its benchmark rate at 1 percent for a “considerable period.

In recent years, since pushing rates nearly to zero in December 2008, the Fed has steadily elaborated on that idea. It promised to keep rates near zero for an “extended period.” Then it announced a series of specific timetables, most recently promising in September to hold rates near zero at least until mid-2015.

Appelbaum goes on to assert that the financial markets were uncertain of how the Fed would adjust policy prior to the advent of this transparency:

Until now, when economic conditions changed, markets were left to wonder whether Fed policy would change, too.

However, Appelbaum’s description of the evolution of policy transparency diverges dramatically from the historical record.

Policy transparency peaked under Volcker when the Fed targeted non-borrowed reserves as the money market target, the monetary aggregates as the intermediate targets. For proof of the transparency of this policy regime, one need look no further than the sometimes volatile market reaction to the weekly release by the Fed of its balance sheet (H.4.1), which reported the level of non-borrowed reserves in the system. One may believe that monetary targeting was not appropriate, but that is a different argument. During the era of non-borrowed reserve targeting, monetary policy was inherently perfectly transparent and observable on a weekly basis. Furthermore, policymakers adopted non-borrowed reserve targeting in part because of they believed that the policy regime and its inherent transparency would over time cause expected rates of inflation to fall more quickly. They believed that the declines in expected inflation would in turn support declines in long-term interest rates and thereby support real economic growth, but they relied on policy actions and not words.

Appelbaum also asserts that policy is more transparent under the current Bernanke regime than it was under both the earlier Bernanke regime and his predecessor Greenspan. However, monetary policy was much more transparent earlier in Bernanke’s tenure when policy was consistent with a Taylor Rule. Taylor-type rules are reaction functions that specify the Fed’s reaction to deviations of inflation and output from their targeted levels. The Fed kept the actual Fed funds rate very close to the level implied by its chosen variant of the Taylor Rule prior to the crisis of 2007. One can argue about the appropriateness of the specific Taylor Rule variant employed by the Fed or with the use of any Taylor Rule, but policy was transparent.

Contrast the transparency during the Taylor Rule regime with the current regime. The Fed now has threshold levels for employment and inflation, but does not specify how interest rate policy will be adjusted either before or after the thresholds are reached. Furthermore, caveats abound as evidenced in this statement by Bernanke at the press conference following the FOMC meeting:

Reaching one of those thresholds, however, will not automatically trigger immediate reduction in policy accommodation. For example, if unemployment were to decline to slightly below 6½ percent at a time when inflation and inflation expectations were subdued and were projected to remain so, the Committee might judge an immediate increase in its target for the federal funds rate to be inappropriate…

..the Committee recognizes that no single indicator provides a complete assessment of the state of the labor market and therefore will consider changes in the unemployment rate within the broader context of labor market conditions….

..the Committee chose to express the inflation threshold in terms of projected inflation between one and two years ahead, rather than in terms of current inflation….In making its collective judgment about the underlying inflation trend, the Committee will consider a variety of indicators, including measures such as median, trimmed mean, and core inflation; the views of outside forecasters; and the predictions of econometric and statistical models of inflation…

Finally, the Committee will continue to monitor a wide range of information on economic and financial developments to ensure that policy is conducted in a manner consistent with our dual mandate.

Bernanke and other believers in increased transparency see a continuation of a Taylor Rule-type reaction function regime. From the press conference:

So it’s really more like a reaction function or a Taylor rule if you will. I don’t want–I’m–I’ll get it–I’m ready to get the phone call from John Taylor. It is not a Taylor rule but it has the same feature that it relates policy to observables in the economy such as unemployment and inflation.

How can the current regime be said to have a reaction function when the policy regime either specifies no reaction to changes in the economic climate or does not specify a reaction? Perhaps Bernanke was channeling a Zen Kung Fu master: “Grasshopper, the optimal reaction function is to have no reaction function.” Furthermore, while at the press conference Bernanke said the new regime “relates policy to observables in the economy such as unemployment and inflation,” but he also listed caveats and indicated that unspecified and unobservable variables will also enter the calculus when policy changes are considered.

We are in unusual times. A hard and fast two-variable rule might very well be inappropriate, if it ever was appropriate. But let’s not pretend that the current policy regime is the high water mark of clarity or transparency.

The matter is further complicated by a distinction that Bernanke draws between interest rate policy and QE. While Bernanke and the FOMC assert that interest rate policy will be unchanged unless the threshold levels for unemployment and/or inflation are reached, the door to changing QE is left open. However, the condition under which QE purchases would be accelerated or unwound is left unspecified. To the extent that QE has an impact on economic activity, it is part of monetary policy, yet no reaction function is mentioned.

Appelbaum also favorably compares the current Bernanke regime with that of Greenspan’s. Ironically, he cites the following quote:

Since I’ve become a central banker, I’ve learned to mumble with great coherence,” Alan Greenspan, a former Fed chairman, told reporters in 1987. “If I seem unduly clear to you, you must have misunderstood what I said.

It is ironic because it was probably the only time during Greenspan’s tenure at the Fed that he was both honest and clear about policy pronouncements, while the current Fed is less clear about policy than it was before while claiming to be more transparent.

Why do many in the MSM function as an uncritical megaphone for the policymakers at the Fed? There are many possible explanations, but two are particularly salient. The first explanation is simply that the reporters do not have the knowledge or background to reach an independent judgment about monetary policy and simply repeat what people in authority positions tell them.

The second possible explanation is more troubling. Fed officials allow access and engineer leaks about policy via selected members of the MSM in return for uncritical coverage of policy or their view of what policy should be. In short, both sides have become “access whores.” Access to officialdom is swapped for favorable treatment in the mass media. In this explanation, the Fed and the MSM have co-opted and corrupted each other. The MSM has constitutional protections to allow it to function as a watchdog, but by swapping the willingness to be critical for access to the Fed they have become lap dogs and abdicated their responsibility to the public. As for the Fed, it has in effect told the public: “You can’t handle the truth.” The Fed communications strategy is aimed at managing and controlling the media and hence the public’s perceptions of policy and expectations about future outcomes. It is very Orwellian.

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  1. Stephen Gardner

    Access whores to the Pentagon, check.

    Access whores to the White House, check.

    Access whores to Heimats securitaet—oops I mean homeland security, check.

    Access whores to the Fed, check.

    Yup. That pretty much sums it up. The MSM are whores. Any questions?

    1. Up the Ante

      “Access whores to Heimats securitaet—oops I mean homeland security, check. ”

      You didn’t see Asa Hutchinson offer DHS funding for the NRA’s armed cops in every school, did you ? check

    2. Maximilien

      @Stephen: “Any questions?”

      Nope, just a few additions:

      Access whores to CEOs, check.
      Access whores to entertainment stars, check.
      Access whores to professional athletes, check.

      There. That about covers everything the MSM “covers”.

      “Journalism is a minor branch of harlotry, in that its practitioners must try to be all things to all men.”—-Anonymous

  2. Susan the other

    If we do not take control of our own money and how it is used, nobody will. Certainly not the private banks. This Congress will not do one single thing about unemployment. Bernanke can’t. So this protocol we call the Federal Reserve has outlived its usefulness. Possibly Congress has too.

  3. joebhed

    It’s more than a bit ironic that what has become acceptable dialogue for the fate of the national monetary economy rests only on the ever-changing metrics of inflation and unemployment.
    Something amiss?
    A new definition will do.

    What would serve the needs of the real economy would be that the agency most responsible for our collective well-being be required to have a plan that showed HOW any policy initiative is transmitted through to the desired positive change in economic outcomes.
    Then you know if they are doing their job or kicking the can down the road.
    There is good reason for the claims that the Fed is already out of all bulets except to wait-and-see-what-happens, which is how I would describe the Chairman’s quote.
    The ZIRP and QE policies are impotent.
    You can put TRILLIONS more reserves into the bankers’ assset stock and not have a dribble of real economic activity.

    The REAL problem with Fed policy is its inability to transform policy initiative to economic outcome.
    And the reason for that inability is much worse than ‘slippage’ in the transmission mechanism.
    It is because the Fed ONLY interacts with banks.
    We need a governmental economic initiative that interact with the consumption side of economic demand.
    The Fed is incapable of doing so, no matter WHAT initiative it uses.
    So, a new economic ‘transmission” mechanism, anyone?
    It’s already on the table of the Congress Assemobled as HR 2990, a bill that tansfers the monetary mechanism to a public authority that allows the GOVERNMENT to actually put new money directly into the economy, rahter than issue debts for deficits.
    Funny how this thing never catches on at NC.

    1. psychohistorian

      I think that the reason that you don’t see more support for Kucinichs’ proposal is that most here are supportive of tweaks to our social system rather than structural change.

      As has been reported elsewhere, us radicals are dissapeared or successfully marginalized while those who agree/support tweaks are played along until their positions are coopted or abandoned.

      Not enough folks are hurting to press for more structural change at this time, unfortunately. We have to wait until it is too late……for humanity.

      1. joebhed

        “”I think that the reason that you don’t see more support for Kucinichs’ proposal is that……us radicals are successfully marginalized and …. we have to wait until it is too late……for humanity.””

        There’s a lot of suport for your position, psycho.

        But for those of who have three certain qualities, it doesn’t work.
        1. We think we know that the monetary system is working against both economic democracy and future prosperity, and therefore NEEDs to change.
        2. We are retired from gainful employment, collecting our dole and free for doing whatever TF we want with our time.
        3. We have grandchildren and know that unless we are prepared for the collapse with a workable replacement system for a modern monetary economy, those grandkidss will not stand a chance in hell of getting anywhere near to the comfort and prosperity that we enjoyed.
        So, this is what we do while the others are waiting.

    2. dannyb2b

      I think separate monetary policy and fiscal policy in order that these get managed by their own specialized agency and their is less confusion and more accountability. Monetary policy is quantitative in nature and should focus on things like the CPI level and quantity of money in circulation and maintaining the most stable and efficient currency system to underpin real activity.

      Fiscal policy should task itself with qualitative issues like employment, investment, R&d, productivity, education, growth.

      1. joebhed

        While I agree about the separate aspects of fisccal and monetary policy, they are somewhat joined by the fact that ultimately the “tax and spend” Congress is also charged with “coining” the nation’s money.
        More important to we monetary reformers is the separation of the ‘coining’ power from the ‘banking’ power.
        Banking is by definiton a private economy function, so private and cooperative banks and credit unions should be intermediating between their depositors and their borrowers in an system that is as free of governmental regulation as is possible. It’s THEIR money.
        Coining – the name given to creating and issuing the nation’s money, is a governmental role for operating the national monetary system on behalf of we the people.
        Once we separate the money power from the banking power we can separate the money power from the political power.
        Because it’s OUR money system, and our government.

        1. dannyb2b

          Yeah I agree about the point you make regarding coining and banking. I heard that the congress has power over coinage in the constitution if Im not wrong. I would definitely be preferable for congress to coining money instead of commercial banks.

          But my point is that a much better system is one where money is created directly into all citizens accounts in an even manner every time the money base needs expanding for the purpose of monetary policy. This is the most balanced manner possible in which currency can enter the economy which would work against any imbalances. This also takes a lot of responsibility off congress hands, makes the system more democratic and participatory. Congress or executive gov can be charged with conducting fiscal policy through money they receive in taxes. Seems to me that my suggestion is a just a modern version of the idea you propose which is now feasible due to our current technological opportunities.

      2. Dan Kervick

        The bifurcation of monetary and fiscal policy is artificial and inefficient. The insistence on this bifurcation is part of a conservative, free-market approach to macroeconomic policy that aims at limiting the power of the public sector to pursue public purpose.

        1. dannyb2b

          You can’t concentrate powers under one agency. Managing money and managing the economy are two separate things. Each arm of gov needs to be independent or specialised. Just as the judiciary is separate to the executive, money creation should be the fourth arm of government. The central bank should never be separate from its constituent the public.

  4. jake chase

    The Fed has done nothing but enrich the banksters and impoverish savers. It will raise short rates when employment is reduced below 6.5%? That will never happen in the next fifty years. As for inflation, the bureaucrats have defined it out of existence, by ignoring the things which people need to buy and concentrating on imaginary things like “computing power”, which a person buys once in five years, if that often.

    This post may demonstrate that the writer knows Taylor Rules and such arcana, but it has nothing to to with the real life influence of the Fed. What the Fed does is reward looters and banksters, while immiserating those foolish enough to put their faith in money. It is nothing but an institutionalized scam and anyone writing otherwise is wasting readers’ time. I can learn more about what is happening in America today by rereading The Eighteenth Brumaire of Louis Bonaparte.

  5. Glen

    The Fed had an easy money policy for four years now, and had an easy money policy during most of Bush’s two terms.

    The problems isn’t in itself Fed policy, but the current financial industrial complex. The industry has ceased to behave in a rational manner with any benefit to society, and has through a period of time, lapsed into a self destructive morass of fraud and corruption. Fed policy hasn’t had an effect on reviving the real economy any more than pumping blood into a zombie would create a healthy person.

    Quit wasting time, funds, and political capital trying to revive the financial industrial complex which cause the collapse of the world economy and get on with replacing it.

    1. Hypothetical_Taxpayer

      Somehow, I don’t believe it will be “listening” the way we like to think of “listening”.

  6. dannyb2b

    Best way to make the fed transparent is to change how monetary policy is implemented so that the fed deals directly with the public and not with commercial banks.

  7. kris

    People, do not talk nonsense, please.
    The Fed is simply a tool for the White House and the Congress. There is no such a thing as an independent Fed. It has never existed.

    Blaming the Fed is the whole point, so people won’t blame congress and WH for everything.

    Why are you guys so naive?

    1. Hypothetical_Taxpayer

      We’ll keep an eye on that from here on out.

      thanks for dropping in and pointing that out.

      it’s like when ya got a boogar hanging from your nose and some kind stranger points it out to you.

      I can’t tell you how much i appreciate you coming by and setting a quarter of a million readers straight on this score.

      Again, thank you so much.

      Merry Christmas…to you and yours.

      Happy New year too (that’s next week already!)

      thx again dude, or dudette… if you are a dudette, that is.

      stop in again and say hi sometime



  8. Groucho

    “The last duty of a central banker is to tell the public the truth.”

    -Federal Reserve Board Vice Chairman Alan Blinder, Nightly Business Report, 1994

    Merry Christmas to Yves & all

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