NEW YORK – While much is made about differing opinions of Federal Open market Committee members, the five-paragraph statement describing its long-run framework, which the panel released in January shows the panel has common goals, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Wednesday.
“Press reports on the FOMC often highlight apparent differences of opinion on policy among meeting participants. In contrast, the framework statement that we released in January is important because it details the common principles regarding goals and strategy that shape FOMC decision-making,” he told the Business Law Institute, according to prepared text of his speech, released by the Fed.
Kocherlakota said the framework statement “does not represent any change in the Committee’s approach to policy, but it does represent a major step forward in the Committee’s communication of that approach to the public. In particular, I think of this statement as providing the basic principles of how the Committee implements its statutory dual mandate that monetary policy should promote price stability and maximum employment.”
Four aspects of the framework of most importance: defining “price stability” as 2% inflation; describing how promoting maximum employment and promoting price stability are weighed against each other; a broad consensus of the panel approved the framework, so changes will need backing of most of the panel; and that no “explicit quantitative interpretation” is offered for “maximum employment.”
The rapid communication changes result from Fed Chairman Ben Bernanke’s vision for communication and from having the fed fund rate target at its lowest level. “The rate can’t get any lower,” Kocherlakota said. “But one way to vary monetary stimulus today is to influence the public’s expectations of how long the fed funds rate will stay so low—and how fast the fed funds rate will rise when it does start to rise. Thus, communication, while always important, is especially so today.”
The summary of economic projections, he reminded, “are not forecasts of what policy will be. They are judgments about what appropriate policy should be.” He acknowledged “this creates the possibility of a conflict between the information in the policy assessments and the Committee’s policy statement issued at the end of each meeting. As Chairman Bernanke has pointed out, the policy assessments are but one of many inputs into the policy process. In his words, the FOMC statement ‘trumps’ whatever information is in the policy assessments themselves.”
Despite the improvements in communication, he said, “there is still more that can be done (of course!),” and referred to prior speeches, where he detailed “the need for a public contingency plan on the part of the FOMC. Such a plan would provide clarity in two important ways. First, it would allow the public to know the kind of scenarios—both surprisingly positive and surprisingly negative—under consideration by the Committee. Second, it would inform the public about how the Committee plans to react to those scenarios.”