VINCENT REINHART: The Fed’s New Communication Policy Will Weaken Its Ability To Signal Commitment On Rates

vincent reinhart
Vincent Reinhart

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The more experts think about the Fed’s new more transparent communication policy, the more they seem to hate it.As we recently reported, the Fed will starting including FOMC voting members’ views on the appropriate monetary policy underlying their economic projections in its quarterly Summary of Economic Projections (SEP).

This increased transparency may not be as obviously positive as one might assume.

“The Fed’s clarification of its SEP disclosure on Friday was itself somewhat unclear,” wrote Vincent Reinhart, Morgan Stanley’s Chief U.S. Economist.  (Some may know him better as Mr. Carmen Reinhart).

Reinhart argues the new policy sacrifices clarity for democracy.  Specifically, he thinks that the new policy will weaken the Fed’s ability to send a firm signal about where rates are heading.

We already know how specific Fed members voted, which reveals plenty about the Fed officials’ “disputatious” nature.  However, publishing actual policy assumptions will only muddy the public’s understanding of policy intent, at least initially.

The Fed has traded a policy of signaling commitment on rates through a formal vote for an arithmetic compilation of opinions about the path of policy.  True, this will be an informed set of opinions coming from the highest Fed officials, but the Fed will now have a more flexible, but weaker, commitment device.  To the extent that the new presentation draws attention to minority views, that commitment value will be weakened even more.

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