The Fed Meeting Before the Meeting

The Meeting Before the Meeting October 18, 2010, Bob Eisenbeis, Chief Monetary Economist

Chairman Bernanke announced in his speech last Friday that the FOMC will commence additional quantitative easing after its next meeting.  At least, this is how both domestic and international markets have interpreted his remarks.  Treasury prices rose and the exchange rate declined following the speech.  This is the culmination of the first public FOMC policy debate and decision making in advance of an actual FOMC meeting.  Many FOMC participants, including Chairman Bernanke, have expressed their views on the economy almost like they would at the actual FOMC meeting.  In particular, virtually all have stated that the inflation rate was lower than desired and that unemployment was unacceptably higher than desired.  Thus, further quantitative easing is justifiable.  Under the circumstances, failure to now provide more quantitative easing would severely damage both the FOMC’s and Chairman Bernanke’s credibility.  What this does mean is that policy is on the verge of becoming endogenous in that the Fed is now in the position of ratifying market expectations rather than conducting policy exogenously. 

The unusual nature of the open-air policy making and somewhat nonconventional views on inflation that have been articulated have been widely commented on by others, as has the appropriateness of formulating policy in this manner.  So we won’t comment on them here.  However, what has not been discussed in the media in considering the Chairman’s speech is the amount of time and discussion he gave to the outdated and stale FOMC forecasts that were made publicly available in the minutes of the June FOMC meeting. 

The FOMC presently makes only quarterly forecasts publicly available, and the current situation only highlights the inadequacy of that policy in supporting the FOMC’s communication efforts.  The June forecasts subsequently have been revised downward by essentially all FOMC participants more than once.  Chairman Bernanke made this point in his Jackson Hole speech, as have other FOMC participants..  The Board staff forecasts were lowered for the second half of 2010 as well as for 2011.  This was clearly stated in the FOMC minutes of the September 21 meeting; and the inference is that FOMC participants’ views were also for slower growth.

What are needed now, as part of the FOMC’s communication and decision-making process, are more frequent forecasts than quarterly from all participants. Rehashing stale, irrelevant news is neither useful nor meaningful.  We have argued previously that such forecasts should be done for each meeting, and the current situation only dramatizes that point.  The benefits of more frequent forecasts are obvious.  They would enhance the FOMC’s communications efforts.  They would reduce reliance upon the Fed staff forecasts and up the priority for each reserve bank to develop and enhance its own forecasting capabilities, thereby ensuring that more options are put on the table for comparison purposes. 

But the current situation suggests some additional changes that might also be made.  First, there is no reason that the FOMC’s Summary of Economic Projections could not be released at the time that the statement is put out after each FOMC meeting.  Those forecasts are compiled in advance of the meeting and are presented in the staff Bluebook prepared for the meeting.  The argument might be that, after the meeting, participants often refine their forecasts; but this is like enabling students to look at each other’s test answers before handing in their own tests.  The reality is that most changes are minor and tend to move views more toward the center so that participants can avoid appearing as outliers.  But there is information, as well as discipline, in publishing those advance views that could prove useful. 

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