The Open Market Committee

In their post-meeting statement, the Fed explicitly acknowledged that their long-run inflation target is two percent. This has long been suspected by Fed-watchers. But now the Fed is publishing its goal. Are there problems with this uber-transparency?

One issue is that we are now drowning in data. We’ve gone from guessing what Fed policy is based on “system rp’s” and “coupon passes” to a turgid, 500-word essay. What’s next? Stream-of-consciousness writing a la James Joyce? Live tweets from the FOMC’s Board Room? There’s so much disclosure that observers can now see whatever they want to see in the Fed’s releases. TMI!

The Fed is also playing with words. Along with its 2% inflation target, the Fed is also defining full employment as 5 ½ to 6% unemployment. This gives an “Alice In Wonderland” impression: full employment means 7 million people are looking for work and stable prices means they double every 35 years. I know there are good economic reasons for these goals, but still!

Finally, excessive visibility has its downside. Arguably, the Fed’s “extended period” language of mid-decade (when Fed Funds were at 1%) led to an over-leveraging of the economy as investors safely borrowed short and lent long. This leverage was disastrous when the economy turned down.

I’m afraid the collegiality of the Princeton faculty lounge is not right ambiance for the nation’s central bank. Bernanke is overseeing a grand experiment in openness. Let’s hope it doesn’t backfire.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-09T16:53:24+00:00 January 26th, 2012|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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