WASHINGTON – The Federal Reserve said yesterday that it would take some of the mystery out of its decision-making, disclosing far more information about its economic forecasts – and, implicitly, about its objectives for growth and inflation.
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Ben Bernanke was a leading expert on monetary policy at Princeton University before he came to Washington.
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Though the changes are incremental, analysts said they would open an important window into the Fed's thinking and would be a significant step in the central bank's slow evolution from obsessive secrecy toward openness.
Starting this month, the Fed will publish its economic forecasts four times a year rather than twice. More importantly, the forecasts will look three years into the future, instead of the current two, and will include considerable detail about the range of views among policy-makers.
In practice, the three-year forecast will provide a guide for what policy-makers want to accomplish and how they hope to do it. That is because the forecast represents what Fed officials expect will happen to the economy in response to “appropriate” monetary policy. In effect, the Fed will be publishing a game plan that it updates every three months.
“I find it helpful to think of the projections as functioning in three different ways: as a forecast, as a provisional plan and as an evaluation of certain long-run features of the economy,” Fed Chairman Ben Bernanke said in a speech at the Cato Institute, a libertarian research organization.
The changes are more modest than those Bernanke has long championed. Bernanke has argued for years that a central bank ought to announce an official “inflation target” that would be a basis for Fed policy.
The announcement marked a compromise among Fed policy-makers, who have spent more than a year deliberating over how to improve communication with the public.
“It actually marks the introduction of inflation-targeting lite,” Paul Ashworth, senior U.S. economist for Capital Economics, wrote in a research note to clients.
That represents a significant departure from the practices of Alan Greenspan, who reigned over the Fed from 1987 to early 2006.
Greenspan opposed all proposals for “inflation targeting,” contending that public commitments would limit the Fed's ability to respond nimbly to unexpected developments.
Bernanke, a leading expert on monetary policy at Princeton University before he came to Washington, argued that an inflation target would make a central bank more open, more predictable and more accountable to the public. In the long run, he argued, greater openness would make monetary policy more effective.
The changes mark the latest step in the Fed's slow but striking transformation toward openness. Until 1994, the Fed did not even announce its decisions to raise or lower interest rates; investors and journalists had to infer the decision by watching for changes in the overnight federal funds rate.
It was only in 2000 that the Fed began issuing statements after every policy meeting about the balance of risks between higher inflation and slower growth. And it was not until 2002 that it published a roll call of how each member of the policy-setting committee voted.
The Fed is one of the few major central banks that does not announce a specific target for inflation. The European Central Bank, the Bank of England and the Bank of Canada have adopted the practice in one form or another.
Alan Blinder, an economics professor at Princeton and a former Fed vice chairman, said the Fed should have moved more decisively.
“If you are a big believer in transparency, which I am, it's incremental,” Blinder said. “If I had my druthers, the Fed would be giving out a forecast eight times a year.”
But Bernanke announced other changes that could shed far more light on the Fed's internal debates. Starting with the next forecast, to be released Tuesday along with minutes from the last policy meeting, the Fed will include a detailed “narrative” about how policy-makers see the forces that will be shaping the economy.
In a tacit acknowledgment of some critics, Bernanke also announced that the Fed forecasts would include the overall rate of inflation, not just the core rate that excludes volatile prices for food and energy.
Fed officials have long argued that core inflation is a more meaningful measure of the true trend in inflation. But critics have said the core rate is meaningless to ordinary consumers, who have to grapple with the soaring costs for gasoline and food.
