The Fed's have-it-both-ways policy
MY VIEW of Ben Bernanke's Jackson Hole speech is similar to my colleague's. I appreciate that he lectured the government on its heedless fiscal policymaking, but I found the tone on monetary policy to be confusing and timid—though not surprisingly so. As I was catching up on my reading after returning to Washington, however, I was struck by the continued divide in interpretation of the Fed's policy moves. Many writers shared the view that the Fed is behaving timidly, and expressed concern that the Fed was unlikely to do much more. Plenty of others, however, continue to argue that the Fed's promise to leave rates low through 2013 is a very good sign, as is the plan to have a two-day September meeting. Help, they argue, is on the way.I just hope that whatever the Fed opts to do in September is spelt out more clearly than its August decision. And while the frustratingly vague nature of the August statement indicates to me that it's unlikely to have the desired effect (assuming that the desired effect is expansionary; one can't really say), it's part of a broader pattern at the Fed of failing to use the expectations channel effectively. As Michael Woodford wrote at the Financial Times last week:If QE2 had any impact, it probably came from the signal it sent about future Fed policy. Inflation expectations increased after the announcement, because those Federal Open Market Committee members who wanted a return to more orthodox policies seemed to have lost the argument. But this is surely not an ideal way to send a signal: expectations can be shaped far more effectively by speaking directly about future policy, rather than leaving it to be inferred from actions that have no definite implications for the future.To be fair, the FOMC did seek to shape expectations in August, by saying that the Fed funds rate target should remain unchanged “at least through mid-2013”. This is a more sensible approach than new asset purchases, but sadly its effect will be limited by its vagueness. To be clear, Mr Bernanke has not actually promised to keep rates low for two years. Instead, his commitment is hedged with qualifications that make its meaning quite uncertain.Of course, it would not make sense for the FOMC to promise to maintain a specific interest rate for two years regardless of what may happen. But Mr Bernanke can and should use his speech today to explain how his policy intentions are conditional upon future developments.It is absurd to speculate about whether the Fed has the ability to provide more of a boost to the economy while the expectations tool is sitting on the shelf. I think Mr Woodford is right in suggesting that the main value of Fed purchases is in demonstrating the central bank's commitment to achieving its stated goals. By leaving those goals vague, the Fed seriously undercut its own stimulative effort. I don't know why. I just hope the Fed works through its hang-ups about clearer signalling by the conclusion of the September meeting.