The Vague Fed
By Arnold Kling
In the testimony, Sen. Shelby asks Bernanke what everyone wants to know: what more can the Fed do for the economy, if needed. Bernanke replies that the Fed has options from lowering the interest on reserves rate, to language changes in the FOMC outlook, to balance sheet tweaks.
He notes current policy is “already quite stimulative” and adds “we do still have options, but they are not going to be conventional options.”
What comes across is a Fed Chairman saying, in effect, “We could save the economy, but we won’t.”
I think that he should be obliged to disclose his thinking in precise terms. What is his forecast of the economy if the Fed executes policy X? What is his forecast if it executes policy Y?
Everyone is acting as if in order to maintain the Fed’s independence, the Fed must be allowed to be vague about its targets, vague about how it might achieve those targets, secretive about how it thinks its actions influence those targets, and ad hoc in its approach to deciding when to take action. I would suggest re-examining such assumptions.
As you know, I do not think that the Fed can actually hit a precise target for something like inflation or nominal GDP. But I do think that having the Fed set such a target would be better than continuing with the current approach.