Fed Trying to Increase Clarity

Bernanke predicts increasing Fed use of public communications.

Federal Reserve Chairman Ben S. Bernanke said the central bank is likely to rely more on public communications as a policy tool as it seeks to provide clarity about the likely future path of interest rates.

“The FOMC continues to explore ways to further increase transparency about its forecasts and policy plans,” Bernanke said today in a speech in Boston. “Forward guidance and other forms of communication about policy can be valuable even when the zero lower bound is not relevant, and I expect to see increasing use of such tools in the future.”

Bernanke and his colleagues on the Federal Open Market Committee have approved untested policy tools at their last two meetings to spur a recovery that has left the unemployment rate stuck near 9 percent or higher for 30 consecutive months. The central bank in August pledged to hold interest rates near zero until mid-2013, and in September the Fed announced it will swap $400 billion of short-term debt for longer-term securities in a bid to lower interest rates.

Unable to lower interest rates below zero, the central bank has relied on forward guidance about its intentions and manipulation of the size and composition of its assets to provide stimulus to the economy, Bernanke said.

Policy makers are weighing how to offer more information about the Fed’s goals, and how such targets influence its decisions. Most FOMC members favor providing more information than the economic forecasts the Fed publishes quarterly, according to minutes of the Sept. 20-21 session. The FOMC has established a working group to study transparency initiatives.

‘Normal Times’

“In more normal times, when short-term policy rates are not constrained, I expect that balance-sheet policies will be rarely used,” Bernanke said in a speech at the Boston Fed’s annual economic conference.

Dallas Fed President Richard Fisher, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia dissented from the decisions at the Fed’s last two meetings. Fisher, who has dubbed the Fed’s Operation Twist “jujitsu with the yield curve,” said in a Sept. 27 speech that the central bank’s recent moves “are likely to prove ineffective and might well work against job creation.”

Kocherlakota said in a speech last week that “the committee’s actions at the last two meetings are inconsistent with a systematic pursuit of its communicated objectives,” noting that unemployment of 9.1 percent in September was down from the 9.8 percent reported in November while most measures of inflation have risen.

Long-Run Estimates

Currently, the FOMC publishes its range of long-run estimates for gross domestic product, unemployment and inflation, a proxy for policy goals. The range for inflation in June, for example, was 1.7 percent to 2 percent as measured by the personal consumption expenditures price index. The range for unemployment was 5.2 percent to 5.6 percent.

The Fed has drawn criticism from top Republican lawmakers, who sent Bernanke a letter before the last meeting asking him not to do “further harm” to the economy and to better explain the Fed’s actions.

Lawmakers, including House Speaker John Boehner and Senate Minority Leader Mitch McConnell, urged Bernanke to refrain from further monetary stimulus, “particularly without a clear articulation of the goals of such a policy” and “ample data proving a case for economic action.” Americans, they said, “have reason to be skeptical” of his plans.

Flexible Targeting

While the Fed lacks a “formal, numerical inflation target,” its policies have “many of the elements of flexible inflation targeting,” Bernanke said. “Like flexible inflation targeters, the Federal Open Market Committee is committed to stabilizing inflation over the medium run while retaining the flexibility to help offset cyclical fluctuations in economic activity and employment.”

Policy makers’ long-run inflation projections are “analogous” to targets even though they aren’t a “formal inflation goal of the Committee as a whole,” Bernanke said.

Flexible inflation-targeting has helped the Fed in manage expectations about prices, Bernanke said.

“The commitment to a policy framework that is transparent about objectives and forecasts was helpful, in many instances, in managing those expectations and thus in making monetary policy both more predictable and more effective during the past few years than it might otherwise have been.”

Bernanke also said that monetary policy may be “too blunt a tool” to control asset-price bubbles. Instead, he said, measures such as ensuring adequate bank capital and liquidity “should be used to address developing risks to financial stability, such as excessive credit growth.”

10-Year Yields

The yield on 10-year Treasuries fell to a record close of 1.72 percent the day after the Fed announced its program to lengthen maturities of the bonds in its portfolio, known as Operation Twist. The yield has since risen to 2.18 percent as of 4:51 p.m. in New York. Lower yields may help reduce borrowing costs across the economy, boosting industries including autos and housing.

Investors have raised their bets for price gains in recent weeks, as measured by the difference between inflation-adjusted and nominal Treasury securities over the next 10 years. Those expectations rose to 1.99 percent inflation today. That’s up from 1.71 percent, their lowest level of 2011, on Sept. 22, the day after the Fed announced Operation Twist.

“Low interest rates for the entire industry is one of the reasons that we think that despite some economic volatility, the auto industry in general continues to be a bright spot in the economy, and we expect that to continue,” Robert Carter, U.S. sales vice president for Toyota Motor Corp., the world’s largest carmaker, said during an Oct. 3 conference call.

Bloomberg News

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