Economists increasingly agree that “monetary policy” is not about tweaking the current fed funds rate, but rather the expected future path of policy. We are now seeing signs that the press also understands Woodfordian monetary economics. Here’s Greg Ip:
The statement released by the FOMC was largely as expected and a non-event for markets: “economic growth [will] remain moderate over coming quarters and then … pick up gradually,” inflation will fall from its temporarily elevated levels to 2% or lower, and the Fed expects to keep interest rates “at exceptionally low levels … at least through late 2014.”
The projections released along with the statement were far more interesting. FOMC members reduced their forecasts for the unemployment rate, and nudged up the outlook for inflation. That hawkish combination was made doubly so by the fact that just four of the 17 FOMC members think the Fed should start tightening after 2014, down from six in January.
Let’s assume that the press and the markets begin interpreting Fed announcements as changes in the expected future path of the fed funds rate. In that case, haven’t we subtly changed the balance of power at the Fed? The entire Board of Governors currently favors holding interest rates to exceptionally low levels until 2014. But most of the 17 potential members of the FOMC do not. Bankers control 12 of the 17 positions on that “expanded FOMC.” (Or 12 out of 19 when the Board is fully staffed.)
In addition, votes on the current setting of the fed funds target are public information. The projections document that Greg Ip links to did not disclose who voted for higher rates in 2014.
A few weeks back I did a post headlined:
House GOP calls for turning macroeconomic policy over to a cabal of unelected bankers, with instructions to ignore the jobless
Now it’s not just a cabal of unelected bankers, it’s a cabal of unelected bankers acting in secret. If this keeps up much longer I might become one of those anti-Fed conspiracy buffs.