Semi-Daily Journal

Fed Policy and Communications Strategy

The Federal Reserve worries about how to communicate with the outside world:

Fed Leaves Communication Policy Unchanged (washingtonpost.com): Federal Reserve officials, vexed about widespread misunderstanding of their policy concerns and intentions earlier this year, met Monday to review how they communicate with the public but decided not to change their practices for now, the Fed said in a statement yesterday. The Fed has been criticized by some financial analysts and former Fed officials for the way in which the central bank has conveyed its concerns about the possible use of some unconventional policies to deal with a possible bout of deflation. Some critics have also complained that speeches and congressional testimony by a number of the officials, including Fed Chairman Alan Greenspan, suggested that the Fed's target for overnight interest rates would be cut more aggressively in June than it was....

With the recent acceleration in demand growth, it is starting to look as though Alan Greenspan may have been right (and I and others like me may have been wrong) in thinking that the Federal Reserve should have moved more aggressively in the past nine months. The likelihood of deflation over the next couple of years has clearly dropped from perhaps 10% to perhaps 1%, and the Federal Reserve should always be making monetary policy with a view not of where the economy is but where the economy will be in eighteen months.

I still think more aggressive policies this year would have been good, but my own odds that I am right have dropped from 80-20 to 60-40 since the summer began.