January 15, 2005
Central Bank Transparency
William Polley points us to Don Kohn's thoughts on central bank transparency:
FRB: Speech, Kohn--Central bank communication--January 9, 2005: ...people sometimes wonder why central bank transparency has evolved as slowly as it has and why some central banks do not take additional steps to talk more--especially about what they see coming in the future. I will give you my own answer to this question.... The answer, I believe, is that more is not necessarily always better.... [C]ertain types of central bank talk might... [receive] too much weight relative to private judgments. We need to be particularly careful that people understand how limited our knowledge actually is--the uncertainty and conditionality around any statement we make about future developments.... The publication of useful information is complicated further by the fact that, in most countries, policy is made by a committee; representing the thinking of a diverse group is difficult and limits what can be said....
What we say is important, but what we do over time will ultimately determine economic outcomes. We should not allow a desire for clarity of expression to deflect our decisions from those that would contribute best to overall economic performance and which may be difficult to explain easily. And we must take care that policy expectations engendered by communication do not unduly constrain policy action....
Experience shows that central bankers generally have been much more comfortable talking about the economic outlook than about policy inclination.... The risks seem more sizable that markets will overweight our discussion of the possible path of policy interest rates than they will our discussion of the economic outlook.... The market reaction to our words could well be heightened by the behavior of market analysts, who tend not to place probabilities on their predictions of our actions over the next few meetings but instead tend to make "zero/one" calls. In any case, the risks of herding, of overreaction, of too little scope for private assessments of economic developments to show through, would seem to be high for central bank talk about policy interest rates.... The stronger the market expectations about near-term policy actions, the greater the risk of roiling markets and creating confusion in the event the decision differs from those expectations....
[T]he Federal Reserve became more explicit about future policy rates in the summer of 2003.... Markets appeared to be anticipating that inflation would pick up soon after the expansion gained traction, and therefore that interest rates would rise fairly steeply. This expectation was contrary to our own outlook.... Under most circumstances, this sort of disconnect between the central bank and the markets would not be a big problem.... Under these circumstances, giving markets more information about our policy inclination, and thereby holding down longer-term interest rates, seemed to be the less-risky way....
Monetary policy committees generally judge the costs and benefits of talking about the economic outlook much more favorably than discussing the path of rates... the most useful service the central bank can provide in this arena is its analysis of the forces bearing on the outlook--the determinants of aggregate demand, potential supply, and inflation. This type of discussion can help the public interpret developments and allow markets to respond constructively to surprises in the data. Forecasts can be used as a framework for such a discussion, but the public should appreciate the limits of a numerical forecast. The relationship of the forecast to the policy decision is loose. Inevitably, point forecasts will be incorrect; they should be seen as the centers of wide distributions of possible outcomes; and low-probability outcomes can be very important in policy decisions in certain circumstances....
Early release of the minutes could have costs if Committee members became more guarded in their discussion out of concern about the effects of their remarks when reported or if, over time, the minutes themselves became less comprehensive. In my view, neither of these developments is an inevitable consequence of the new schedule.... On one or two occasions in recent years, longer delays in release of the minutes had resulted in market confusion because the minutes were interpreted as pertaining to the most recent decision, not the one at the preceding meeting for which the minutes were prepared.... Over the past several decades, central banks have become considerably more open about their decisions and the reasons for them. Progress has been incremental--and may have seemed slow to some--but we have been adapting to changing circumstances in financial markets and in the governance of central banks in democratic societies....
Posted by DeLong at January 15, 2005 07:40 AM
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The key thing most people seem to forget is that the Fed does not know any more about the economy then the markets even though the Fed economic forecasting model may have the best record of any model.
Posted by: spencer at January 15, 2005 08:14 AM
Transparency is of special importance to a government agency that is not directly subject to Administration or Congressional influence. There may be no more influential goernment agency, so we are owed continual explanations about Federal Reserve economic assessment and influences on decision making.
Posted by: anne at January 15, 2005 08:19 AM
"Experience shows that central bankers generally have been much more comfortable talking about the economic outlook than about policy inclination."
In other words, they would rather talk about the future economy which has a low probability of being accurate than about their future actions which has a relatively high probability of being accurate. Why don't they just talk about the weather forecast?
Posted by: JackM at January 15, 2005 10:35 AM
The real reason for non transparency is the desire to gain greater power over events by amassing greater secret knowledge over factors influencing events.
Posted by: rod at January 15, 2005 10:38 AM
So much for government agency independence, alas:
Agency Running Social Security to Push Change
By ROBERT PEAR
The Social Security Administration is preparing a major public relations campaign to market the idea that Social Security faces dire financial problems requiring immediate action and private accounts.
Posted by: anne at January 15, 2005 11:34 AM
He views the period where the Fed talked markets into the Fed's own belief that there was a not a big inflation spike on the way as a success. But arguably now the Fed has created a "too much credibility" problem for itself (I think I've lifted that phrase from Roubini) -- because the markets are so confident about long rates staying low, the Fed would have difficulty tightening even if it wanted to. Note that the big bond market bet right now is the sell the short and buy the long.
Posted by: P O'Neill at January 15, 2005 12:44 PM
The Social Security agency has created the crisis scenario by making an absurdly low estimate of American long term economic growth. Happily, there are realists about :) The agency has evidently become simply another publicity arm of the Administration.
Posted by: anne at January 15, 2005 12:55 PM
Agency Running Social Security to Push Change
By ROBERT PEAR
Over the objections of many of its own employees, the Social Security Administration is gearing up for a major effort to publicize the financial problems of Social Security and to convince the public that private accounts are needed as part of any solution.
The agency's plans are set forth in internal documents, including a "tactical plan" for communications and marketing of the idea that Social Security faces dire financial problems requiring immediate action.
Social Security officials say the agency is carrying out its mission to educate the public, including more than 47 million beneficiaries, and to support President Bush's agenda.
"The system is broken, and promises are being made that Social Security cannot keep," Mr. Bush said in his Saturday radio address. He is expected to address the issue in his Inaugural Address.
But agency employees have complained to Social Security officials that they are being conscripted into a political battle over the future of the program. They question the accuracy of recent statements by the agency, and they say that money from the Social Security trust fund should not be used for such advocacy.
Posted by: anne at January 15, 2005 01:09 PM
I've written before about Bush's Putinization of American society. The breakdown of the divisions between president and party, between his administration and the state it administers, between the state and the businesses it regulates, and between party propaganda and media. The recent Armstrong Williams fracas can be viewed in that light. Fundamentally, it's less an issue of journalistic ethics than of governing ethics. No free society will ever be free of some degree of malfeasance among its commentariat. The deplorable practice of op-eds for hire and the related plague of astroturf organizing should be resisted by good-hearted people, but some slippage on the part of unconsciencious people is inevitable. A desire by the administration to corrupt the purposes of the state and misuse its citizens tax dollars in this manner, however, is not. Today's report in The New York Times that the Social Security Administration will be transformed from its legitimate purpose of administering Social Security to serving as a propaganda organ for the privatization drive should be seen in this light.
The government of the United States is not the personal property of the President of the United States. But to a president who's already used the Treasury Department on several occassions as propaganda outlet, who has maintained that wartime removes all limits on executive power, who feel frees to violate the rules of congress and illegally hide pertinent information from its Members, who uses the United States Navy as a campaign prop, and who views loyalty rather than accuracy as the primary value of an intelligence report, it apparently is.
Posted by: lise at January 15, 2005 01:30 PM
Imagine the Social Security agency advertising to privatize Social Security. There is no shame among this Administration.
Posted by: lise at January 15, 2005 04:43 PM
Back on track, the argument that a central bank shouldn't let markets know what it's thinking in case the markets think it knows what it's doing is absurd. For one thing, if it keeps saying what its thinking it won't be long before markets realise it doesn't know what it is doing and discounts the thoughts appropriately.
Sounds like it is more about preserving mystique to me. As others point out, this is especially wrong for a body that is explicitly placed outside the control of a democratic government.
Posted by: derrida derider at January 15, 2005 05:22 PM