Because Federal Reserve officials attempt to do too much with speeches and forward guidance, communications are confusing, according to Mickey Levy, chief economist U.S., Americas and Asia at Berenberg Capital Markets.
“The Fed’s communications and forward guidance, which are a critical component of monetary policy, lack clarity and transparency,” Levy said at the Shadow Open Market Committee meeting on Friday. “They try to achieve too many goals: managing and fine-tuning the economy, financial markets and expectations; providing forecasts; and conveying risk assessments. The result is unnecessary confusion and adverse impacts on financial and economic performance.”
In speeches, Fed officials concentrate on current economic conditions, which are beyond their control and do not directly speak to their dual mandate of stable prices and maximum employment. Even the statement after Federal Open Market Committee meetings begins with a round-up of economic conditions.
This gives the impression that the Fed is concerned about short-term conditions, and it is attempting to manage the economy, Levy said.
Fed official should concentrate in public discussions on economic and financial conditions within the Fed’s scope to influence.
To improve communications, Levy says, “The Fed needs to rein in its excessive communications” and “revamp its quarterly Summary of Economic Projections (SEPs) to include forecast uncertainties that emphasize the conditionality of monetary policy.”
Specifically, Levy suggested, the post-meeting statement should start with an “assessment of whether its current monetary policy is consistent with its longer-run dual mandate; provide separate risk assessments of inflation and the economy and/or employment; and include its balance sheet strategy.”
To improve the SEP, or dot plot, Levy would like members to “estimate 70% confidence intervals around his/her baseline forecasts of real GDP growth, the unemployment rate and inflation,” and the Fed to include “three appropriate paths of the Fed funds rate: a baseline forecast and separate forecasts for his/her upper and lower bands of estimated confidence intervals.”
Also, the SEP should offer a median of members’ baseline expectations and estimated confidence intervals. “The median confidence interval forecasts would replace the current central tendency and range forecasts,” Levy said. “This would provide new insights to financial markets and the public.”
The SOMC meeting, under the auspices of the Manhattan Institute, focused on Fed communications and its balance sheet.
