A Note on Communications with the Federal Reserve: Focus

Adding to a point made in In Lieu of a Focus Post: March 2, 2015 (Brad DeLong’s Grasping Reality…):

Let me note that the estimable Tim Duy continues to watch a failure to communicate:

1. Financial markets think that the Federal Reserve will either delay the interest-rate liftoff for at least another year or two or, if they do lift-off, find themselves reversing course within eighteenth months to try to restart a stalled economy.

2. The Federal Reserve thinks financial markets have lost their moorings with reality, and that it will soon be appropriate to raise interest rates in a strengthening economy in which secular stagnation considerations are at best third-order.

3. Elementary optimal-control considerations strongly militate for waiting to tighten: stimulating the economy at the zero lower bound is difficult; restraining the economy away from the zero lower bound is easy.

4. The decision to adopt a 2% per year rather than a 3% per year or a 4% per year inflation target was driven in large part by belief in the Great Moderation; since we no longer believe in the Great Moderation, that decision should be rethought.

5. The inconsistent behavior of the employment-to-population ratio and the unemployment rate makes for more than the usual amount of uncertainty about what exactly “full employment” is–and that, too, strongly militates for waiting to tighten.

Yet the Federal Reserve in its internal decision-making processes appears to be focusing 100% on (2), and 0% on (1), (3), (4), and (5). And that raises the question of why: Just what are the internal decision-making committee processes within the Federal Reserve that are leading to such an outcome? Ex ante, I would have expected many individual members of the FOMC to be very unhappy with such a possibly-premature tightening–what is the reason that they are not? That the Federal Reserve has failed to make its thinking clear enough to me for me to get where they are coming from seems to me to be a major failure–but whether of their communications policy or of my comprehension I am not sure…

• Tim Duy: Game On http://economistsview.typepad.com/timduy/2015/03/game-on.html
• Janet Yellen: Humphrey-Hawkins Monetary Policy Report to the Congress http://www.federalreserve.gov/newsevents/testimony/yellen20150224a.htm
• Michael S. Derby and Pedro Nicolaci da Costa: Stanley Fischer: Fed Closer to Rate Rises, But Exact Timing Remains Unclear http://blogs.wsj.com/economics/2015/02/27/fischer-says-fed-sees-rate-rise-sometime-this-year
• Michael S. Derby: [Fed’s John Williams Sees Door Open for Interest-Rate Increases Starting in June http://blogs.wsj.com/economics/2015/02/26/feds-williams-sees-door-open-for-interest-rate-increases-starting-in-june
• Michael S. Derby: Fed’s James Bullard: Delaying Interest-Rate Increase Much Longer Creates Risk http://blogs.wsj.com/economics/2015/02/27/feds-bullard-delaying-interest-rate-increase-much-longer-creates-risk
• William Dudley: Remarks at the 2015 U.S. Monetary Policy Forum http://www.newyorkfed.org/newsevents/speeches/2015/dud150227.html