Fed ponders more clarity on policy framework
NEW YORK/SAN FRANCISCO
NEW YORK/SAN FRANCISCO (Reuters) - The Federal Reserve is looking to lift the veil a bit more on how it plans to steer the U.S. economy back to health.
Policymakers this month considered a range of economic yardsticks that could be used to help set interest rates and at the same time give financial markets and investors a clear steer on what lies ahead.
Fed Chairman Ben Bernanke and other officials even conducted an experiment involving their economic forecasts that could shine a brighter light on the direction of policy, according to minutes of the July 31-August 1 meeting, which were released on Wednesday.
They plan to experiment again next month.
The sharper focus on better ways to communicate reflects the central bank's dwindling conventional options, such as interest rates, which are already near zero, to revive U.S. economic growth.
Even the efficacy of the large-scale asset purchases, known as quantitative easing, is running low, economists say.
Any actual changes to the way the Fed communicates were put off, and there was little clarity in the minutes on exactly what shape they might take.
But economists said helpful, if esoteric, changes appear to be coming, once the Fed's top officials can settle their differences and reach a delicate agreement on just how to do it.
"It would give a good starting point for discussion, a consistent rubric to the process that I think would earn the Fed a lot of interest and credibility amongst market participants," said Carl Tannenbaum, chief economist at Northern Trust and former head of the Federal Reserve System's risk group.
Since becoming Fed chairman in 2006, Bernanke has pushed to make the central bank more transparent. Before 1994 the Fed didn't even announce its policy decisions, leaving investors to scour the money markets for signs it had taken action on interest rates.
The chairman now holds news conferences after key policy meetings. He notched another victory in January when the Fed set a formal inflation target of 2 percent, and at the same time published the expectations of each policymaker for rates.
Last year, the Fed took a page out of the playbooks of some other central banks, saying it expected to keep interest rates ultra low for a set period.
At the last meeting, a few participants questioned whether the conditional pledge to keep rates low through late 2014 was clear enough, and suggested replacing it with "guidance that was linked more directly to the economic factors," the minutes said.
For now, the Fed appears set to keep providing the guidance and perhaps push into the future the calendar date on how long rates are expected to stay low.
Another option to spur growth: "Many participants" embraced an open-ended bond-buying program for any future stimulus, the minutes said. The Fed's previous two rounds of bond buying have been for fixed amounts over a set period.
Such a change would itself be a change in communications, said Barclays economist Michael Gapen: "It would, in effect, say that the Fed is in motion until the data tell it to stop."
The Fed next meets September 12-13.
DEVIL IN THE DETAILS
The challenge in establishing a set of parameters to help set monetary policy is to find agreement on what kind of data should constitute a stop sign for the Fed's stimulus.
A subcommittee at the Fed that is looking into new ways the central bank communicates with investors and markets includes the dovish chief of the Federal Reserve Bank of Chicago, Charles Evans, and his hawkish peer from Philadelphia, Charles Plosser.
For nearly two years now, Evans has argued the central bank should vow to keep adding stimulus until the unemployment rate falls below 7 percent, sticking with that policy unless inflation threatens to breach 3 percent.
Plosser too has argued strongly for policymakers to agree to a set of economic variables - chiefly inflation, but not necessarily exclusively - to which policymakers should react, calling such a goal "feasible."
Still, several participants at the meeting raised concerns that the usefulness of so-called "simple rules" would be limited, according to the minutes.
"Evans has one view of what the simple rules should be, but I think others have very different views," said Roberto Perli, managing director of policy research at Washington-based broker dealer International Strategy and Investment Group.
"So the challenge there is ... to find an agreement of what exactly the rule should be."
Evans himself told CNBC on Friday that "we can't seem to agree on these economic markers like I am mentioning." A second-best solution, he said, would be to press forward with bond-buying, even without a new communications framework.
The policy-setting Federal Open Market Committee, at its July 31-August 1 meeting, also tested the idea of a new consensus Fed forecast for the economy, and an associated path for policy.
The "initial experimental exercise (was) intended to shed light on the feasibility and desirability" of such a forecast, the minutes said.
It was unclear how it would be expressed. Some economists worry that a consensus forecast would confuse or contradict the Fed's regular forecasts for GDP growth, inflation and unemployment, which already include "central tendencies."
Others say additional clues on how the Fed may act would be positive for investors given the increasingly dominant role that central bankers have played in financial markets.
"More communication changes are probably in store - eventually," Goldman Sachs economists wrote in a note to clients.
(Editing by Chizu Nomiyama)
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