(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Agnes T. Crane
NEW YORK, Nov 14 (Reuters Breakingviews) - The Federal
Reserve needs to spend some time out of the spotlight. After
experimenting with massive new policy initiatives since the 2008
crisis, the hyperactive U.S. central bank has already said it
probably won’t raise rates for years. Now it’s considering
specifying levels of unemployment and inflation which could
change that. It’s a recipe for confusion.
Minutes from the last policy meeting in October, published
on Wednesday, show central bankers debated the merits of
ditching guidance that keeps interest rates near zero for a
defined period of time – currently until 2015. Instead, they
could provide thresholds for economic indicators that would
trigger a policy rethink. The minutes don’t specify which
indicators are preferred, but the Fed’s dual employment and
inflation mandate and a speech this week from Vice Chairman
Janet Yellen make the jobless rate and some measure of prices
the obvious contenders.
Saying short-term rates would stay low for years never
seemed a great idea, though Fed Chairman Ben Bernanke was trying
to manage market expectations. Despite the fact it’s only a
forecast, investors mostly interpret it as a commitment – and
that makes them too comfortable. Introducing thresholds might in
theory help make them more alert to how Fed policy might change
along with economic realities. But in practice it would probably
make Bernanke’s job even more complicated.
First, there’s the problem of what the thresholds should be.
Charles Evans, the Chicago Fed president, reckons short-term
rates should remain zero-bound while the jobless rate is over 7
percent and inflation under 3 percent. His colleague from
Minneapolis, Narayana Kocherlakota, sees the magic numbers at
5.5 percent and 2.25 percent, respectively. Even then, Bernanke
will have to convince the public that such targets are triggers
only for a re-evaluation, not necessarily for action. Otherwise
he would compromise the Fed’s cherished flexibility.
Any attempt to convey such nuances is risky, with investors
looking for simple messages. The Fed would be better off
bringing back a little mystery. After all, until the crisis
struck in 2008, there was a lot more of that. In fact, weaning
markets off a running commentary from the central bank almost
counts as a first step in the process of reversing the radical
policies of recent years. Keeping quiet occasionally would
finally let market forces begin to reassert themselves.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- The U.S. Federal Reserve on Nov. 14 published minutes of
the Oct. 23-24 meeting of the Federal Open Market Committee.
Participants favored using economic indicators rather than
calendar dates to communicate future policy, the minutes said.
In 2011, the central bank said it wouldn’t raise rates until
2013. It has since extended that timeframe to 2015.
- In a speech on Nov. 13, Fed Vice Chairman Janet Yellen
said she supported the notion of using an unemployment rate
threshold when deciding when to raise rates. Chicago Fed
President Charles Evans and Minneapolis Fed President Narayana
Kocherlakota have also championed using a threshold for
unemployment and inflation when considering future policy.
- Fed minutes: link.reuters.com/mem93t
- Janet Yellen’s speech: link.reuters.com/kem93t
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(Editing by Richard Beales and Martin Langfield)
Keywords: BREAKINGVIEWS FED/
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